Not a Member? Get access to HR news and resources that you can trust.
HR professionals can play a key role in creating business efficiency—starting with their own department.
Is your employee handbook ready for the New Year? With SHRM’s Employee Handbook Builder get peace of mind that your handbook is up-to-date.
Get the HR education you need without travel expenses or time out of the office.
We don't just visit a city, we take it over. Join us in NOLA -- June 18 - 21, 2017.
The information below is excerpted from a longer SHRM article,
Consumer-Driven Decision: Weighing HSAs vs. HRAs.
Consumer-directed health plans (CDHPs) typically 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) or health reimbursement arrangement (HRA).
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 (HSAs)
Health Reimbursement Arrangements (HRAs)
• HSAs must be linked to a high-deductible health plan (HDHP). For 2016 and 2017, HSA-linked HDHPs must have an individual deductible of $1,300 or higher, or a family deductible of $2,600 or higher.
• HSAs have maximum total out-of-pocket expenses. For 2016 and 2017, these maximums are $6,550 for single coverage and $13,100 for family coverage.Also see the
SHRM Online articles on
2016 HSA plan limits and
2017 HSA plan limits)
• HSAs cannot be used to pay health plan premiums, except for qualified long-term care insurance, health insurance while receiving federal or state unemployment compensation, COBRA plans and Medicare 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 can be used to reimburse
health insurance premiums in some circumstances. Previously nonintegrated HRAs could not be used to pay for individual policy premiums on a pretax basis, such as when individual coverage is purchased by employees through a public health insurance exchange. But a law enacted at the end of 2016 lets a new type of small business HRA pay nongroup plan premiums.
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 2016, the HSA contribution limits from all sources are $3,350 for single coverage and $6,750 for family coverage (with an additional $1,000 catch-up contribution for account holders age 55 or older).
For 2017, the HSA contribution limits from all sources rises to $3,400 for single coverage but stays at $6,750 for family coverage (again, 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 pre-tax dollars through a Section 125 salary-reduction cafeteria plan.
HRAs must be funded solely by employers. Employer contributions are not taxable to the employee.
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
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 for chronic conditions as preventative treatment covered outside the deductible and without cost-sharing (for instance, see
this formulary for Blue Cross Idaho HSA-compliant plans).
Business Insurance reported in November 2014, a Mercer survey showed that the percentage of employers treating maintenance medications as “preventive” has been steadily increasing. As of 2013, 42 percent of employers with 500 or more employees were not subjecting certain maintenance medications considered to be preventive to deductibles in HSA-qualified HDHPs, up from 31 percent in 2012. Among the largest employers (5,000-plus employees), their HSA-qualified HDHPs were even more likely to use a liberal definition of preventive medications, Mercer found, with 57 percent covering them at 100 percent of cost in 2013, up from 46 percent in 2012.
HRA-linked insurance plans unquestionably may cover prescription drugs outside of the deductible and without cost sharing.
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
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.
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.
Related SHRM Articles:
IRS Issues 2017 Contribution Limits,
SHRM Online Benefits, May 2016
Do HSAs Lead to a Shift in Prescription Drug Use?,
SHRM Online Benefits, April 2014
Misunderstanding HSAs Is Open-Enrollment Hurdle,
SHRM Online Benefits, August 2013
You have successfully saved this page as a bookmark.
Please confirm that you want to proceed with deleting bookmark.
You have successfully removed bookmark.
Please log in as a SHRM member before saving bookmarks.
Your session has expired. Please log in again before saving bookmarks.
Please purchase a SHRM membership before saving bookmarks.
An error has occurred
Recommended for you
Become a SHRM Member
SHRM’s HR Vendor Directory contains over 3,200 companies