What’s the difference between an HSA and an HRA?
Susan Kelley, Kellsson Linens Inc., Denver
Currently I have a traditional health insurance plan for my business partner and myself. However, I hardly use my insurance, while my partner uses all of his and more. I would like to change from this tradtional health insurance into either a Health Savings Account or Health Reimbursement Account, but find it difficult to get information in regards to how these plans operate, and which would be most beneficial to the company and/or to each of us personally. Can you breakdown these 2 plans, with the pros and cons of each plan, so I can make a more informed decision before our current insurance renewal date?
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DiggYou are an owner…the HSA in this case will be better for you. You and your partner can fund the HSA’s just as you would fund an HRA, however, you benefit as the funds will build up and carry over year to year, while your partner will use the funds. Your account will grow over time, your partner’s account will be depleted each year.
Tax treatment will be the same for the company under either scenerio. Much also depends on the number of employees you have, as funding an HSA in a high-turnover environment is a recipe for disaster. If it’s just you and your business partner, do the HSA.
Often, the fees associated with an HRA along with the expected claims which are now your responsibility rather than the insurer’s, will offset any premium savings you would achieve. If it is just the two of you, factor that in.
The main difference between a Health Savings Account and a Health Reimbursement Arrangement is control. With the HSA you are in control of the account while the HRA gives the control to the employer. Any unspent money can be carried over to the next year with an HRA, but cannot be taken with you if you leave the company. This is where an HSA is better as the unspent money remains in a savings account drawing interest and money in the HSA can be used for investing.
The HRA offers a tax advantage to the employer, while the HSA can offer a tax advantage to both the employer and the employee. The HRA gives the employer increased flexibility and control, but overall the HSA plan has more advantages to both the employee and employer.
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If you are both employees of your firm then a fully funded HRA is a great way to go as it provides you the most flexibility. HSAs MUST be paired with a high deductible health plan, the premiums for which cannot be paid from the HSA. HRA funds can be used to purchase any individual or family policy you want. Having an HRA that is fully funded relieves you of ongoing administrative burdens. You just pay into the account and an administrator handles the payments. The best do this electronically. One firm has the best possible combination of features and that is an HRA that can be combined with HRAs from other jobs (either for an individual or family) to make more money available for healthcare.