M—Health Reimbursement Arrangements
Both a Health Savings Account (HSA) and a Health Reimbursement Account (HRA) can help employees afford out-of-pocket medical expenses on a tax-advantaged basis and can help employers minimize the cost through tax incentives. The chart below summarizes some of the
differences between the two types of accounts:
| General Differences Between an HSA and HRA
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| HSA
| HRA
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| Owner of Account?
| Employee
| Employer
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| Who funds the plan?
| Employee and/or Employer
| Employer. Vesting may apply.
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| Access to funds in account
| Direct access to funds to pay for qualifying medical costs. The funds can be withdrawn after age 65 for any expenses, without penalty, and subject to income tax.
| Employee pays out-of-pocket for the qualifying medical cost and requests reimbursement from the account.
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| Is the account portable?
| Yes
| No, but may or may not be used in retirement based on plan.
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| Earn “Interest” on Account?
| Yes. Part of employee’s account balance.
| No, though the employer can invest the funds.
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| Taxation
| Tax-deductible contributions, tax-free growth and tax-free withdrawals for qualified medical costs.
| Employer makes tax-deductible contributions, and employee receives tax-free reimbursements from the account for qualified medical costs.
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| Eligibility for plan
| Employee must be enrolled in a High Deductible Health Plan (HDHP) to participate in an HSA and must not be enrolled in Medicare.
| Employees can participate in an HRA regardless of health plan.
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| Covered Medical Costs
| Qualifying medical costs, including qualifying long term care insurance, and Medicare Part B, D and Advantage Plan premiums, copays, coinsurance and deductibles. A list of qualifying expenses is updated by IRS annually.
| Qualifying medical costs, determined by the employer, can be reimbursed.
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| Penalties
| Medical costs that do not qualify are subject to 20% penalty and income tax on the amount taken.
| Generally, no penalty for the employee unless the reimbursement is not used for a qualifying medical cost.
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| Contribution Limits
| IRS sets annual maximum contribution limits (total employer and employee contributions must not exceed limit) for HSAs, based on high deductible health plan(HDHP) coverage. A ‘catch-up’ contribution (indexed) for participants age 55 and over is available. No further contributions allowed at age 65.
| None
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Under a health reimbursement arrangement, it is possible to pay for the medical expenses of an employee and the employee’s dependents. A health reimbursement arrangement can be provided for the employees of a C corporation, a partnership, or a sole proprietorship. However, the partners of a partnership and the sole proprietor cannot be covered and receive the same tax benefits, as they are not considered “employees.” Only the stockholders of a corporation who are also employees of the corporation can be covered and receive the tax benefits. For this purpose, the stockholder-employees
of an S corporation who own more than 2 percent of the outstanding stock or voting power are treated the same as partners. Sole proprietors and partners can deduct 100 percent of amounts paid during the taxable year for medical insurance for themselves and their dependents. To take the deduction, the individual
must not be eligible to participate in any subsidized health plan maintained by his employer or his spouse’s employer. The deduction is allowable in determining adjusted gross income (but is limited to the amount of the individual’s income from the business for which the plan was established).