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Health Care Consumerism: HSAs and HRAs

Factors to consider when deciding whether to adopt one or the other, or both

A piggy bank filled with coins and a swiss cross.

[Editor's note: This article has been updated from a previous version.]

Consumer-directed health plans (CDHPs) combine a health insurance plan with a tax-advantaged account that enrollees can use to pay for medical expenses—most commonly a health savings account (HSA), a health reimbursement arrangement (HRA) or a health care flexible spending account (health FSA).

This article compares HSAs and HRAs, and discusses factors for employers to consider when deciding whether to adopt one or the other, or both. SHRM Online has more about health FSAs here.

The Basics

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.

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 2022, HSA-linked HDHPs must have an indivdual deductible of at least $1,400, or a family deductible of at least $2,800.
For 2023, HSA-linked HDHP minimum deducitbles rise to $1,500 for individual coverage or $3,000 for a famly plan.

• HDHPs have maximum total out-of-pocket (OOP) expenses. For 2022, the OOP maximums are $7,050 for self-only coverage and $14,100 for family coverage.
For 2023, the OOP maximums rise to $7,500 for self-only coverage and $15,000 for family coverage.
See the SHRM Online articles on 2022 HSA/HDHP limits and 2023 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 let 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 June 2019, federal agencies issued final regulations to let employers of any size that don't offer group coverage to fund a premium-reimbursement HRA that employees could use to buy individual-market insurance, known as an individual coverage HRA (ICHRA).

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 2022, the HSA contribution limits from all sources rises to $3,650 for single coverage and $7,300 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 and ICHRAs, QSEHRAs have annual contribution limits, adjusted annually for inflation. In 2021, annual employer contributions for QSEHRAs are capped at $5,300 for a single employee ($441.67 per month) and $10,700 for an employee with a family ($891.67 per month).


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.

There are some exceptions to the requirement to satisfy a CHDP's 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, for diabetes supplies and other eligible expenses.

IRS Notice 2019-45 allows (but doesn't require) HSA-eligible HDHPs to provide expanded pre-deductible coverage for medications and services that prevent the exacerbation of chronic conditions. 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).

CARES Act Expanded HSA-Eligible Purchases

As part of the Coronavirus Aid, Response and Economic Security (CARES) Act signed into law in March 2020, account holders can now use HSAs, HRAs or health flexible spending account (FSAs) to pay for over-the-counter medications without a prescription. The coronavirus-related legislation also allows HSAs, HRAs and FSAs to pay for certain menstrual care products, such as tampons and pads, as eligible medical expenses. These were permanent changes and applied retroactively to purchases beginning Jan. 1, 2020.

Being able to use an HSA to pay for over-the-counter medications "empowers individuals to better manage their own health care needs and reduces the administrative load on doctors' offices facing a strain on resources," said Alison Moore, vice president of marketing at HealthSavings Administrators, a firm that manages consumer-directed health accounts.

In addition, the CARES Act allowed HDHPs to cover telehealth and other remote care services before participants have met their deductible without affecting their eligibility to make HSA contributions. This provision, originally set to sunset at the end of 2021, was extended through December 2022.

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. 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. 

Penalties for Nonqualified Expenses

Those under age 65 (unless totally and permanently disabled) who use HSA funds for purchases other than eligible medical expenses face a penalty of 20 percent of the funds withdrawn from the HSA and used for those purchases. Funds spent for nonqualified purposes are also subject to income tax.

HSA distributions that are made by mistake can be returned to the HSA if there is clear and convincing evidence that the distribution was made "because of a mistake of fact due to reasonable cause."

HSA rules are provided in IRS Publication 969.

Why 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."

Related SHRM Articles:

IRS Announces Spike in 2023 Limits for HSAs and High-Deductible Health Plans, SHRM Online, April 2022

Spending Law Extends Pre-Deductible Telehealth Coverage Through 2022, SHRM Online, March 2022

IRS Announces 2022 Limits for HSAs and High-Deductible Health Plans, SHRM Online, May 2021

Employers' Interest in Individual Coverage HRAs Is Rising, SHRM Online, November 2021

Employees Still Perplexed by HSA Plans During Open Enrollment, SHRM Online, October 2020

QSEHRAs Help Small Employers Solve the Health Care Coverage PuzzleSHRM Online, May 2019


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