Can Your Company Offer Both an HRA and an HSA? Answer: Well,It Depends!
Yes, an employer can offer both an HRA and a Health Savings Account. But the details of the plan determine whether the program violates federal tax law.
The rule of thumb that you can't pair a Health Savings Account with a Health Reimbursement Arrangement doesn't always hold. But it should raise red flags. Although a traditional HRA disqualifies an employee from opening and funding a Health Savings Account, a limited HRA design is permitted. And so are some arrangements in which different employees are offered an HRA or a Health Savings Account.
Let's try to understand what's permitted and what isn't.
Defining the Terms
Health Reimbursement Arrangement. An employer-sponsored reimbursement program, funded solely by the company. It's an IOU or a promise to pay, not a financial account. If an employee incurs qualified claims, the HRA reimburses them. If not, the company retains the funds to spend on other budget items. Employers can permit a carryover of unused funds, but they're not required to do so.
Health Savings Account. A personal financial account to which owners/employees and employers can contribute. Contributions - including employer deposits - are in cash and vest immediately. The owner/employee retains the balance to reimburse current or future qualified expenses tax-free. Unspent funds automatically remain in the account (no forfeiture) until the owner/employee spends them.
Each program has its place in a benefits line-up. An HRA allows employers to be more generous with reimbursement commitments because most employees don't incur claims up to the HRA limit. It's not uncommon for an employer to pay out 50% or less of the total commitment because many employees are low claimants in a single year.
A Health Savings Account is often attractive to employees who value cash more than a promise to pay and want to build an emergency medical fund. Employer may not offset as much of the deductible through a Health Savings Account because every dollar that they contribute is a dollar out the door, whether or not the employee incurs claims that year.
Two Medical Plans - one with Health Savings Account and one with an HRA
Many employers who believe in healthcare consumerism give their employees a choice of two (or more) medical plans - each with a distinct reimbursement account.
Example: The company offers a medical plan with a $2,000 deductible and an HRA that reimburses the first $1,000 of deductible expenses and a separate HSA-qualified medical plan with a $3,000 deductible and a $1,50 Health Savings Account contribution.
This structure is permissible under federal tax law. Each plan is distinct. The employee can decide whether the plan with the lower deductible and an employ er IOU (the HRA pays only when the employee or covered dependents incur claims) or the option with a higher deductible but cash contribution to the Health Savings Account is more advantageous. Employees who anticipate low claims (accepting potentially higher out-of-pocket exposure if they are high claimants that year in exchange for the opportunity to build a medical emergency fund for future reimbursement) or who are aggressive wealth-builders are more likely to choose the Health Savings Account option. The HRA product will attract those who incur higher claims, since they have a lower net deductible after the HRA dollars are applied to their claims.
One Medical Plan and Choice of Health Savings Account or HRA - Part 1
An employer - particularly a small company constrained by insurer rules to offer only one medical plan - may be tempted to purchase an HSA-qualified plan and give employees the choice of either an employer-funded HRA or a Health Savings Account with or without an employer contribution.
Example: The company offers an HSA-qualified plan with a $4,000 self-only deductible. It offers each employee the choice of an HRA that reimburses the first $2,500 of the deductible or a Health Savings Account with a $1,500 company contribution (with an employee option to add more through pre-tax payroll deductions).
This plan is not permissible under federal tax law. The Health Savings Account contributions are governed by Cafeteria Plan rules. A Cafeteria Plan is an employer-sponsored program that allows employees to receive a portion of their pay in the form of a pre-tax deduction into a qualified reimbursement account (like a Health Savings Account, Health FSA, or Dependent Care FSA, or to pay medical premiums). Those rules forbid giving individual employees the choice of an HRA or a Health Savings Account.
One Medical Plan and Choice of Health Savings Account or HRA - Part 2
Employers can offer the choice of an HRA or a Health Savings Account with a single medical plan if it divides the employee population into qualified classes.
Example: The same $4,000 HSA-qualified medical plan above. The employer offers a Health Savings Account program to all employees who meet account eligibility requirements and contributes $2,500 to the account. The employee population includes some workers who are age 65 or older and are enrolled in Medicare. They are not HSA-eligible. The company offers them an HRA with the same $2,500 funding level.
This plan is permissible because no employee is given the choice of an HRA or a Health Savings Account. The employer has divided the population in a permissible manner by segregating workers who aren't HSA-eligible and helping them reimburse their out-of-pocket costs for covered expenses.
An HRA isn't as attractive as a Health Savings Account because the HRA is a promise to pay. If the employee incurs few eligible claims, she doesn't receive much from the HRA (although the company can allow a carryover of unused funds). In contrast, the employer contribution to Health Savings Accounts is a cash deposit and remains in the account (no forfeiture) until spent next month, next year, or decades from now. So, the HRA isn't as attractive, but it provides reimbursement when employees who can't open a Health Savings Account need it - in the year that they incur those out-of-pocket expenses.
One Medical Plan with a Health Savings Account and a Post-Deductible HRA
Employers can buy down, saving on premium in exchange for accepting a higher deductible, and then offsetting that higher deductible with an HRA.
Example: The same self-only $4,000 HSA-qualified medical plan above. The employer integrates an HRA that reimburses all deductible expenses above $2,000. HSA-eligible workers can open a Health Savings Account, to which the employer contributes $750.
This benefit design is permissible. The HRA described above is called a Post-Deductible HRA. It doesn't begin to reimburse any medical-plan expenses until the employee has satisfied the statutory minimum annual deductible for an HSA-qualified plan, or $1,500 for self-only coverage and $3,000 for a family plan in 2023 (up from $1,400 and $2,800 in 2022). Because neither the medical plan nor the HRA reimburses any expenses below those statutory limits, enrolled employees who are otherwise HSA-eligible can open and fund a Health Savings Account.
The company can contribute to employees' Health Savings Accounts, even if the combination of the Post-Deductible HRA and employer contributions to the Health Savings Account reduce employees' financial responsibility below the statutory $1,500. That's because Health Savings Accounts aren't medical plans and employer contributions aren't reimbursements. The employer contribution to workers' Health Savings Accounts is a form of compensation deposited into a personal financial account - not, technically, a medical-reimbursement account - that the employee owns and manages as he sees fit.
The Role of a Limited-Purpose HRA
There is another type of HRA besides the Post-Deductible HRA that doesn't disqualify an employee from opening and funding a Health Savings Account. It's called a Limited-Purpose HRA, and it reimburses dental, vision, or dental and vision expenses only. It's not integrated with a medical plan. It's not disqualifying because under Health Savings Account rules, dental and vision coverage - whether traditional insurance or through an employer-sponsored reimbursement program - are permitted.
Example: The company offers one or more medical plans, at least one of which is part of a Health Savings Account program. It decides to eliminate dental insurance and instead give every employee a dental HRA to reimburse up to $1,000 of dental expenses.
This alternative form of dental reimbursement may be attractive to employer and workers alike. Dental insurance usually includes a low ceiling on annual benefits paid. And it has networks that may not include employees' preferred providers. A dental HRA allows an employee to see any dentist and reimburse any service in full (no more 50% coverage for major restorative work). But the employee no longer has access to the discounts that dental insurers negotiate with participating providers.
The Bottom Line
Be sure you understand the rules if you offer - or advise clients who offer - HRAs and Health Savings Accounts as part of a benefits package. Always remember that an HRA is a medical plan, so it must meet the definition of an HSA-qualified plan for enrollees to be HSA-eligible. And never forget that no individual employee can be offered the choice of a traditional HRA or a Health Savings Account.
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1yBe sure to understand when these two accounts can be paired - and when they can't.