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Consumer-Driven Decision: Weighing HSAs vs. HRAs

Sidebar: Intel's shift to consumer-directed plans

updated May 22, 2020

Despite their similar and sometimes confusing acronyms and their overall purpose of allowing tax-free reimbursement of various types of medical expenses, health savings accounts (HSAs) and health reimbursement arrangements (HRAs) are quite different when you get down to the details. And it's these details that help an employer choose which approach is most appropriate for its goals and its employee population.

Health Care Consumerism

Consumer-directed health plans (CDHPs) typically combine health insurance plan with a tax-advantaged account that enrollees can use to pay for medical expenses—most commonly an HSA or HRA, although the term is sometimes used for insurance offered with a health care flexible spending account (health FSA).

Enrollees in CDHPs, whether linked to an HSA or HRA, must keep track of funds in their accounts. If the account's funds are exhausted before the deductible is met in a given year, enrollees are responsible for paying for the difference out of pocket until they meet the plan deductible.

After an enrollee meets the deductible, the plan operates much like a traditional preferred-provider organization (PPO) plan. That is, generally the plan pays for most of the cost of covered services and the enrollee contributes a cost-sharing amount—which varies by plan—until meeting the maximum out-of-pocket spending limit, at which point the plan pays 100 percent of the cost of covered services.

There are some exceptions to the requirement to satisfy the plan deductible before the plan will pay for health services received. Under the Affordable Health Care Act (ACA), for example, coverage of preventative health care (including annual physicals, vaccines and cancer screenings under specified guidelines) must be provided on a first-dollar basis, outside of the deductible, including for those enrolled in HSA- or HRA-linked plans.

Prescription Drug Coverage

Funds contributed into an HSA on a pretax basis—whether by employees or their employer—can be used to pay for most prescription drug costs paid out-of-pocket by employees, but not for over-the-counter medications except for diabetes supplies and some other eligible expenses.

Prescription drugs for chronic health conditions are often not considered preventative care by insurers, and therefore treated as only reimbursable in an HSA-linked plan after the deductible is met. However a growing number of HSA-compliant high-deductible plans have begun treating prescription drugs that seek to avert disease for at-risk enrollees as preventative treatment covered outside the deductible and without cost-sharing (for instance, see this HSA-compatible preventative drug list from CVS Caremark and this preventative drug list for Premera Blue Cross HSA-compliant plans).

HSAs vs. HRAs: Requirements and Features

Health Savings Accounts

Health Reimbursement Arrangements

Plan Design

• HSAs must be linked to a high-deductible health plan (HDHP). For both 2020 and 2021, the individual deductible must be at least $1,400 and a family deductible must be at least $2,800.

• HSAs have maximum total out-of-pocket (OOP) expenses. For 2020, the OOP maximums are $6,900 for self-only coverage and $13,800 for family coverage. For 2021, the OOP maximums are $7,000 for self-only coverage and $14,000 for family coverage
Also see the SHRM Online articles on:

-- 2020 HSA/HDHP limits.
-- 2021 HSA/HDHP limits.

• HSAs cannot be used to pay either group or individual-market health plan premiumsalthough HSAs can pay for COBRA continuation coverage, qualified long-term care insurance,  health insurance while receiving federal or state unemployment compensation,  and Medicare or Medicare Advantage plans, but not Medicare supplemental (Medigap) premiums.

• HRAs are often coupled with an HDHP but there is no requirement that they must be.

• There are no government-set out-of-pocket maximum limits specifically for plans linked to HRAs.

• HRAs for active employees generally can not be used to pay nongroup (individual-market) health plan premiums. However, a law enacted at the end of 2016 lets a new type of small business stand-alone HRA pay nongroup plan premiums, such as for individual policies purchased by an employee through the Affordable Care Act's Marketplace exchange. The qualified small employer HRA (QSEHRA) is only available for employers with fewer than 50 full-time equivalent employees, if the employer doesn't sponsor a group health plan.

In September 2018, federal agencies issued proposed regulations to let all employers fund a premium-reimbursement HRA that employees could use to buy individual-market insurance.

Unspent Funds

HSA funds are "real dollars" in an employee-owned account. Unspent funds are rolled over to the next year, reducing or eliminating the enrollee’s share of the deductible in subsequent years.

HSA account-holders can invest funds in interest-bearing accounts or, if the administering firm allows it, mutual funds.

An HRA is a notional account controlled by the employer. Most HRAs allow the attributed "funds" to accumulate from year to year; however, this is not required and is at the employer's discretion.

Most HRAs do not pay interest to participants, nor do they allow participant-directed investments.


HSAs may be funded by employees, by employers, or by both. 

For 2020, the HSA contribution limits from all sources rises to $3,550 for single coverage and $7,100 for family coverage (with an additional $1,000 catch-up contribution for account holders age 55 or older).

For 2021, the HSA contribution limits from all sources rises to $3,600 for single coverage and $7,200 for family coverage (with an additional $1,000 catch-up contribution for account holders age 55 or older).

Employer contributions are not taxable to the employee. Employee contributions can be made with pretax dollars through a Section 125 salary-reduction cafeteria plan.

• HRAs must be funded solely by employers.Employer contributions are not taxable to the employee.

 Unlike HRAs, QSEHRAs have annual contribution limits, adjusted annually for inflation. In 2018, annual employer contributions for QSEHRAs are capped at $5,050 for a single employee and $10,250 for an employee with a family.


HSAs are employee owned and portable on termination of employment. Prior to termination, HSA funds can be transferred from one HSA administrator (including the default firm selected by an employer) to another HSA administrator at the account-holder's discretion.

An HRA's funds generally revert to the employer on termination of employment.

Employers can offer post-retirement HRAs as a retiree-only medical benefit.

A report by health insurer Aetna reveals that, based on a multiyear study of 2.3 million Aetna plan enrollees:

Plan sponsors that replaced their previous plan options with an HRA- or HSA-linked plan experienced lower annual cost trends over five years, producing savings of nearly $21.5 million per 10,000 enrolled members.

The average plan sponsor saved nearly $9 million per 10,000 enrollees when an HRA or HSA was offered as a plan option.

Those with HRA- or HSA-linked plans had 5 percent lower non-urgent emergency room use than those with traditional plans.

Different Value Propositions

In general, HRAs provide employers with the most flexibility, while HSAs provide more control to employees. Both are an important part of the value proposition an employer offers to its employees. Therefore, the type of account should be chosen with care.

“It is important to think about what elements of each choice might appeal to the employee base,” said Alexander Domaszewicz, a principal and senior consultant with Mercer HR Consulting's Health & Benefits Services. For example, one company’s employees might appreciate the portability of an HSA, while others might be interested in an HRA if the employer is more willing to make larger contributions on employees’ behalf relative to potential out-of-pocket health care expenses (because employees cannot take their account balances with them).

Therefore, "when communicating the value of the account to employees, it is important to emphasize what it brings to the table," said Domaszewicz.

What follows is a discussion of the key elements employers can consider when choosing between an HRA and an HSA.

HSA: Giving Employees 'Skin in the Game'

An HSA is one of the cornerstones of consumer-directed health plans and is designed to give individuals an incentive to be smarter and more conscientious health care consumers. Not only does an HSA allow employers and employees to contribute to the account, it allows employees to keep any unused funds for use in future years and to roll over those funds when they leave the company.

“In my experience, 75 to 80 percent of employers are choosing an HSA over an HRA,” said Domaszewicz. “HSAs can create a sense of shared accountability among employees that is more visible and tangible because any money saved stays in the HSA. An HSA can also be used to foster behavior change by giving employees some skin in the game for practicing better consumerism.”

The most compelling attribute of an HSA is its ability to provide individuals with a stake in managing their own health care purchasing. If an individual or the employer make contributions to an HSA, any money the employee doesn’t use for qualified medical expenses remains in the account and available for use in subsequent years. Because employees retain ownership of the funds in the accounts, employees can roll over the HSA into another account when they leave a job, just as they would a retirement account. Then, when the individual becomes eligible for Medicare, the individual can continue to use HSA funds to pay for medical expenses or withdraw the money for any other reason (in which case, it would be taxed as regular income).

The Aetna study found that HSAs yielded more dramatic cost savings than HRAs. HSA enrollees had 15 percent lower primary care physician utilization for nonroutine visits, such as for a cold or sore throat; 11 percent lower specialist utilization; and 9 percent lower overall medical costs compared with those in a traditional preferred-provider organization (PPO) plan.

"While Aetna's research does show savings on HRA plans, we saw more dramatic results with HSA plans in terms of greater reduction in nonroutine visits and nonurgent emergency room visits, and employees being more engaged in their health care and continuing to save," said Chris Riedl, head of enterprise medical products at Aetna. "We believe the HSA members are even better consumers than HRA members. However, our HRA plans still show more favorable results than what we saw in a comparison PPO group."

At Boyne Resorts, an HSA Sole-Option Success Story

Stephen Kircher, president of eastern operations for 8,000-employee Boyne Resorts, addressed his company's success with an HSA, first as an option and then as a full-replacement for traditional plans, while speaking at the 24th National Conference on Health, Productivity & Human Capital in Washington, D.C., in September 2010.

Kircher noted that in 2005 Boyne Resorts added an HSA-linked plan as a high-deductible, low-premium option, with 30 percent adoption by employees that year. By 2007, adoption had grown to 70 percent, thanks in part to "education and advocacy throughout the company" on the benefits of HSAs.

In 2009, the company dropped all its non-HSA options, and saw a 21 percent drop in overall premiums for 2010, "saving each family an average of $1,400 per year," Kircher said. "We saw an $800,000, or 30 percent drop in company costs with the same contribution level," he noted.

The company now offers employees a choice between two HSA-compliant high-deductible health plans —one with a somewhat higher deductible and lower premium than the other, for employees who might prefer that option.

HRA: The Employer’s Tool

Although—or even because—they lack portability, the case for HRAs can be compelling in some circumstances, given that HRAs, which come with few requirements, provide a great deal more flexibility to employers than HSAs.

“Employers have more control over the money in an HRA,” said Domaszewicz. Because HRA funds do not belong to an employee, the employer retains any funds left in an HRA when an employee leaves the company. This is a particularly attractive feature for employers in industries, such as retail or fast food, with traditionally high turnover.

Moreover, an HRA can be an attractive option from a cash flow perspective because the "funds" attributed to the HRA "account" are notional in nature (tracked within the accounting system) but actually funded only when a claim is presented.

“Employers that choose an HRA tend to be more paternalistic and they find that adopting an HRA is easier,” said Domaszewicz. “Because only the employer is putting money in the HRA, the employer gets to make all the rules for the benefit plan.” For example, if an employer does not want to adopt the minimum deductible required for an HSA, it can adopt an HRA plan with a lower deductible. Alternatively, HRAs can be linked to plans with out-of-pocket maximums that are higher than the limit the government sets for HSAs.

“With an HRA, employers have more flexibility in terms of the deductibles they choose for the health benefit plan, and even whether they carve out pharmacy benefits,” said Elizabeth Wolff, a principal at Aon Hewitt in Chicago.

"There are places where HRAs are still a good choice," added Aetna's Riedl. "Implementing a plan with a deductible that's not as high as you might see in an HSA-compatible plan might be an easier transition, initially, from richer designs."

HSAs allow only preventive care to be outside the deductible and covered 100 percent on a first-dollar basis, whereas "If the employer wants to have certain benefits not subject to the deductible, if they want to steer people to designated high-value health care centers of excellence or have particular types of care covered at 100 percent, HRAs allow them to do so," Riedl observed.

Similarly, under HSAs in most cases members must pay the full cost of prescription drugs until the deductible is satisfied, whereas HRAs generally allow co-pays for drugs.

Real Consumerism?

On the other hand, Riedl pointed out, a key reason for a high deductible (for nonpreventive services) is to make employees more cost-conscious when selecting medical services providers and weighing treatment and procedure options. But even if an HRA is not linked to a high-deductible plan, the employer still funds co-insurance and other out-of-pocket costs through the nominal account—and should educate employees that once the accumulated employer contributions are exhausted, it's the employee's responsibility to pay for services received until the out-of-pocket maximum is met.

Riedl warns, however, that some HRA plans are so generous that very little consumerism is left. "If an employer funds an HRA at an amount equivalent of the full deductible, there's no consumerism there," she noted. "Or if they provide a 100 percent co-insurance plan once the deductible is met, again, there's no portion of member responsibility that gives employees an incentive to get engaged in understanding the cost of care. Those plans, despite using HRAs, are not in the spirit of what we think consumer-directed plans should be."

Either or Both?

In 2014, the Eighth Annual Cigna Choice Fund Experience Study compared the claims experience of more than 3.6 million Cigna customers enrolled in a CDHP using either an HSA or HRA, versus those enrolled in a traditional PPO or HMO plan through the same insurer. The study indicated that individuals covered by CDHPs were more likely to use health improvement programs, comply with evidence-based medicine best practices, and lower their health risks, resulting in improved total medical expenses by 12 percent. The study also found that employers that fully transitioned to offering only a CDHP option had 14 percent more low-risk individuals and 28 percent fewer high-risk individuals compared to customers in a traditional plan.

In the end, workforces vary widely and what might work best for one organization (high-deductible, employee-owned HSAs) may not be the ticket for others (employer-controlled HRAs). "We have companies that offer one or the other, and in some instances they offer both," said Riedl.

At Intel Corp., HRAs and HSAs Each Have a Role

"Intel started on our journey into consumer-driven plans in 2003, when health reimbursement arrangements (HRAs) first became available," Tami Graham, global benefits design director at Intel Corp., told SHRM Online. "At that time, we designed the plan to be neutral from a cost perspective to our other health plans; it was more about providing greater choice and flexibility. There is a monthly premium charged to employees, but we seed the HRA spending account with funds that can be used for the 10 percent co-insurance charge."

Over time, she noted, and particularly with the advent of employee-owned health savings accounts (HSAs) linked to high-deductible plans, "the financial structure became a lot more interesting. We introduced an HSA-linked high-deductible plan in 2005, when they became available. Our high-deductible HSA plan charges employees no monthly premiums at all to participate. That's our primary incentive to drive employees to the high-deductible plan. Whether you're an employee-only or an employee plus spouse and 10 children, the only out-of-pocket expense for our high-deductible plan is when you actually incur service from a health care provider."

After paying up to the deductible, she continued, employees in the HSA-linked plan would pay a 10 percent co-insurance charge on health services until hitting the plan's out-of-pocket maximum, "and then it's 100 percent coverage. Preventive care, even before health care reform, is covered 100 percent."

Because Intel started with an HRA-linked plan and subsequently added the HSA-linked high-deductible coverage, "we had employees who already had significant accumulations in those HRA accounts. It's not easy to move that money from one type of account to the other," Graham explained. "If we were able to do it over, and HSAs were available at the same time as HRAs, we probably would just have gone with the high-deductible plan [linked to HSAs]. But because of the evolution of those products, we do have both. And we've found that they work differently for different situations. Large families tend to migrate to the high-deductible HSA plan because it's offered with no monthly premium and a maximum out-of-pocket exposure, whereas smaller families like the consumerism but prefer the first-dollar coverage that they get out of our HRA model."

She added, "Again, if we had it to do over we'd probably have only one. But the way it's worked out, it provides people with choices in how they engage in a consumer-oriented plan."

Wellness Incentives

Intel provides a premium incentive of $250 for employees who participate in its "Health for Life" wellness program, according to Graham. That translates into a $250 reduction in premiums for participants in the HRA plan. For employees in the HSA plan, "we contribute the $250 incentive straight into their health savings account. Otherwise, Intel doesn't contribute funds to employees' HSAs."

Social Media

When Intel first introduced consumer-directed plans, "there was top-down push of information to employees about what the plans were and how they worked," Graham said. With the advent of social media—Intel's internal blogosphere is called "Planet Blue"—employees started sharing their experiences with the consumer-directed plans, and as a result enrollment in the plans grew much higher. "Peer-to-peer conversations were more effective at showing how our plans worked for individuals in different situations," Graham noted. "While we continue to use the traditional corporate channels to communicate, we rely heavily on the blog channel as well."

Health Care Reform:

HSA penalties for nonqualified expenses. Effective Jan. 1, 2011, the penalty for using HSA funds for nonqualified (that is, non-medical) expenses for those under the age of 65 (unless totally and permanently disabled) increased from 10 percent to 20 percent of the funds used for nonqualified expenses. Funds spent for nonqualified purposes also are subject to income tax.

HSAs and coverage of adult children up to age 26. While the ACA allows parents to add their adult children (up to age 26) to their health plans, the IRS has not changed its definition of a dependent for health savings accounts. This means that an employee whose 24-year-old child is covered on their HSA-qualified high-deductible health plan is not eligible to use HSA funds to pay for medical bills for that 24-year-old.

If account holders can't claim a child as a dependent on their tax returns, then they can't spend HSA dollars on services provided to that child. According to the IRS definition, a dependent is a qualifying child (daughter, son, stepchild, sibling or stepsibling or any descendant of these) who:

  • Has same principal place of abode as the covered employee for more than one-half of taxable year.
  • Has not provided over one-half of their own support during taxable year.
  • Is not yet age 19 (or not yet age 24 if a student) at the end of the tax year, or is permanently and totally disabled.  

Other Uses of an HRA

"The HRA component of a health plan is essentially self-funded by the employer, which gives the employer a lot of flexibility, and can be tailored to their specific needs or desired outcomes," explained Elizabeth Kay, compliance and retention analyst at AEIS Advisors, a benefits consultancy in San Mateo, Calif.

"For example, if an employer has a young population that is healthy, it may want to use an HRA to pay for emergency room visits and hospital in-patient stays, but not office visits so the employer can help protect its employees from having to pay those 'large ticket items,' but not blow their budget. While an employer with a more seasoned staff, or diverse population, may want to include prescription drugs as a covered benefit under the HRA, as well as office visits, hospital in-patient stays, outpatient surgery, etc. Or, if an employer needs to look at cost saving measures, it may want to exclude prescriptions from being eligible under the HRA."

Retiree Health

HSA reserves can be used by account holders to pay for qualified post-retirement health expenses but cannot be limited by employers to post-retirement health. But HRAs, on the other hand, can be designed so that employees vest in funds during active working years but can only use those funds to pay post-retirement health bills.

Employers also have flexibility to tailor post-retirement HRAs in a number of ways, including by designing them to pay only "Medigap" supplemental health plan premiums, for instance.


Joanne Sammer is a New Jersey-based business and financial writer. Her articles have appeared in a number of publications, including HR Magazine, Business Finance, Consulting, Compliance Week and Treasury & Risk Management. Stephen Miller, CEBS, is an online editor/manager for SHRM.

Related SHRM Articles:

IRS Announces 2021 Limits for HSAs and High-Deductible Health PlansSHRM Online, May 2020

Employees Still Perplexed by HSA Plans During Open EnrollmentSHRM Online, October 2019

Employees Not Using HSAs to Invest for Retirement Is a ProblemSHRM Online, July 2019

Additional Resources:

HSAs vs. HRAs: Things Employers Should Consider, United Benefit Advisors, May 2017

Why Some Companies Offer an HRA, United Benefit Advisors, May 2017


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