In HRA or HSA?– Part 1 and HRA or HSA? – Part 2, we took a look at the basic components of the HSA and HRA. This time, let’s weigh the pros and cons of each benefit and decide which is best for your company.
First, let’s list what they have in common. Both benefits are tax-advantaged accounts. Both save the employer money by helping reduce insurance premiums. And both are designed to help employees with increased health insurance costs.
- HSAs must be tied to a high-deductible health plan (HDHP) and must comply with maximum limits as defined by the IRS. HRAs can be paired with any health plan and limits are defined by the employer.
- HSAs may be funded with employee and employer contributions. HRAs are funded solely by the employer.
- Employer contributions to an HSA must be equitable and given to all eligible employees. HRAs are funded only if employee has an eligible expense.
- Unspent funds in an HSA belong to the employee. The HRA is not funded unless an employee has a reimbursable expense.
- HSA funds are portable and go with the employee at termination. HRAs are not portable.
For us, there’s a clear winner when these two benefits are compared. In our opinion, the HRA is the best design for employers because it limits their liability and still helps the employee pay for expenses not covered by the group health policy. In addition, HRA’s designs are unlimited. Each employer can design the plan that best suits their situation.
That being said, some argue that the HSA is the better plan. The HSA is designed to encourage employees to be better healthcare consumers by placing more responsibility in their hands. For example, should an employee use the emergency room or is it possible to use a less expensive urgent care center when a need arises? With the HDHP and HSA, the employee has financial responsibility and is more likely to consider the difference in cost since they must use their own funds (either out-of-pocket or the HSA) to pay for the service. Plus, with an HDHP, preventive services are generally covered at 100% and do not cost the employee anything.
Ultimately, it’s for you as the employer to decide which plan is right for you. The most important thing to remember is that either of these benefits can help minimize the ever-increasing health insurance premiums you and your employees pay.