HRA or HSA? Which Is a Better Option if Your Company Offers You a Choice?

The alphabet-soup menu of reimbursement accounts can be confusing. As open enrollment approaches for many employees, it's important to understand the differences.

I recently conducted an enrollment meeting with employees at a client with whom I was unfamiliar. As I explained the new Health Savings Account program effective July 1, an employee noted that this new plan was much more complicated than the one they had prior to July 1. We quickly deduced that the old plan was a Health Reimbursement Arrangement with a direct claims feed from the insurer that automatically sent payments to employees who incurred qualified expenses.

I conceded that this old plan was indeed less complex than the current program. I then went on to explain the advantages of the new program.

These employees didn't have a choice between an HRA and a Health Savings Account. They had one option last year and a new one this year. But many companies offer these programs side-by-side during a plan year. When they do, which one is better? That's an individual choice, and an important one. Here's a guide to help each employee determine which option is better in her situation:

Defining the Accounts

A Health Reimbursement Arrangement is an employer-sponsored and -funded account that's integrated with a major medical plan. [Note: there are other HRAs that reimburse medical premiums or fund retirement benefits, but our focus here is on an integrated HRA.] It's an annual reimbursement plan open to benefits-eligible employees whose company offers the plan. It's funded by the employer only (no direct or indirect employee contributions). It's essentially an IOU from your company: You incur a qualified out-of-pocket expense on your medical plan and the company promises to reimburse that expense tax-free. Many third-party administrators maintain electronic links with insurers so that eligible claims are sent directly to the TPA for immediate reimbursement (no employee action necessary) to the employee or medical provider. That's the source of the employee's comment about how uncomplicated the program is.

A Health Savings Account is a personal financial account that anyone who meets certain eligibility requirements (the most prominent of which is enrollment in an HSA-qualified plan) can open and fund. Most account owners open their account through work and make pre-tax contributions. Employers can contribute as well. Health Savings Accounts aren't an employer-sponsored plan, nor do they have a distinct plan year. Instead, they're a permanent financial account through which owners can accumulate balances (no forfeiture of unused funds) and employees can take with them when the leave a job.

The Options

You won't be offered a single medical plan with a choice of enrolling in an HRA or an HSA. That's an impermissible choice under federal tax law.

What you will see is a choice of two medical plans, both with deductibles - one integrated with an HRA and the other offered with a Health Savings Account.

Example: A company offers a plan with a $1,500 (self-only)/$3,000 (family) deductible with an HRA that reimburses the second half of the deductible (bringing the net deductible down to $750/$1,500. It also sponsors an HSA-qualified plan with a $2,800/$5,600 deductible and employer contributions of $1,200/$2,400 to help employees manage deductible expenses.

Assessing the Options

It's always important to run the numbers when considering which plan works best for you and your family. The math is tricky because if you're generally healthy, you don't know whether next yar your luck will run out and you'll be diagnosed with a serious illness or be involved in an accident requiring extensive medical care. Even if you're managing a chronic condition, you never know when you'll have an acute episode or a separate illness or injury.

In general, here are the factors that you must consider:

Premiums. Your employer deducts a portion of your pay for your share of premiums. This figure can be considerably different between or among your plan options. Be sure to understand the difference. A $30 difference may not seem like much, but it adds up to $720 annually if you're paid semi-monthly.

Cost-sharing. Most workers today are enrolled in plans with a moderate to high deductible. The plan with the lower or lowest deductible and coinsurance always looks attractive at first glance. But be sure to consider the difference in premiums (above) and the amount that the company will give you (below) to reduce our net deductible.

Employer funds. If you have an HRA or a Health Savings Account, your net out-of-pocket responsibility will be reduced. Be sure to calculate your net responsibility in a worst-case scenario.

Your projected expenses. The deductible and other cost-sharing represent your maximum responsibility. Be sure to think about how likely you are to incur those costs. A healthy Peloton rider or a vegetarian long-distance runner may project claims far lower than a diabetic or cancer patient. It's important to look beyond the plan's maximum out-of-pocket responsibility to project a realistic picture of your likely claims.

Financial benefits. Finally, understand the financial benefits of each plan. An HRA is merely a reimbursement account. You can't add funds to your HRA (though you may have access to a Health FSA to set aside additional reimbursement dollars). And you may not be able to roll over balances (your employer makes this choice, and most either don't allow it or set a cap), and in most cases (again, an employer choice), you can't retain your balance after you leave work (although you can continue to receive reimbursements temporarily if you continue your medical plan by exercising your COBRA rights.

In contrast, you can contribute to your Health Savings Account and enjoy an immediate reduction in taxable income. You own your balances and can retain your money and watch your funds grow for years or decades before you ultimately spend it tax-free on qualified expenses.

So, Which Option Is Better?

Each employee's situation is different, so there's no single criterion to make a two-minute decision. But there are some general concepts to consider:

Low utilizer: You may be better off pocketing your company's Health Savings Account contribution each year rather than having access to but not using HRA funds.

Moderate utilizer: This is often the most difficult scenario to evaluate because of what constitutes moderate. Perhaps a rule of thumb is a family that incurs between $2,500 and $4,000 in deductible expenses. The good news is that picking the "wrong" plan typically doesn't lead to much more out-of-pocket spending than choosing the one that would have been better in any single year.

High utilizer: Here, the structure of your out-of-pocket financial responsibility is important. Does one plan have a higher deductible but then no coinsurance? Remember, the benefit of an HRA is limited to your employer's funding level. If you own a Health Savings Account, you can add to your employer's contribution with your own pre-tax deposits up to the annual limit.

Other expenses and other accounts: Do you have high health-related expenses beyond medical claims? Items like restorative dental work, orthodontia, contact lenses, or scheduled vision-correction surgery? If so, HRA funds can't be used to offset any of those expenses. But you can contribute to a Health Savings Account to purchase those services with pre-tax funds (in effect giving you a discount of 20% to 35% on every dollar spent).

If you have a Health FSA, an account that you fund with a fixed annual pre-tax election, it offers the same immediate tax benefits of a Health Savings Account and may be paired effectively with an HRA. But if your employer doesn't sponsor a Health FSA, you can't enjoy discounts on qualified expenses without a Health Savings Account rather than an HRA.

The Bottom Line

Most employees spend less time choosing benefits during open enrollment than they do mindlessly watching a rerun of Seinfeld, ALF, or Golden Girls. That's unfortunate, because understanding your benefits and making the optimal choices can either (1) put additional money in your paycheck or (2) buy more protection from risk for you and your family.

This year more than ever, with the effect of inflation on your family's finances, it's important to make the right choices based on the right information. The HRA-versus-Health Savings Account decision is an important choice that many employees face. Now you have a better understanding of how to evaluate your medical options.

#HSAWednesdayWisdom #HSAMondayMythbuster #HSA #HealthSavingsAccount #TaxPerfect