When it comes to pre-tax savings for qualifying medical expenses, employers have several options available to offer employees. Two of the more popular options are health savings accounts (HSAs) and health reimbursement accounts (HRAs). Both provide valuable benefits for employees. Which to offer may depend on several factors, including what type of health plan the company has, how much the employer wants to contribute, if anything, what other benefits are available, and which offering might be most appealing to the company’s employees.
HSA and HRA Features
HSAs are individual accounts set up at banks or other financial institutions that provide tax-free savings for qualifying medical expenses of the individual and his or her dependents. An HSA is not an employer plan, but employers often offer them to employees when they offer high-deductible health plans, as defined by the IRS (see our prior blog for 2025 required deductibles). Generally funded by employee contributions, an employer can, but is not required to, make contributions to the HSA as well.
While there are several types of HRAs, we will discuss the integrated HRA, which provides tax-free savings for qualifying medical expenses of the individual and his or her dependents, but differs from an HSA in that it is fully funded by the employer. Employees cannot contribute to an HRA. Once a qualifying medical expense is incurred, the employee seeks reimbursement of the expense, potentially at the time of service if the employer offers an HRA debit card. In order to not violate a number of ACA mandates, employees must be enrolled in either the employer’s group health plan or another employer’s group health plan to receive HRA contributions. There is no legal limit on the amount an employer may “contribute” to the HRA, but any limit an employer sets must be applied on a non-discriminatory basis.
Conversely, an HSA has an annual contribution limit that includes the total amount contributed to the HSA including both employer and employee contributions. For 2024, the individual limit is $4,150 ($4,300 for 2025) and the family coverage limit (for employees that have also enrolled one or more dependents in their plan) is $8,300 ($8,550 for 2025).
Contributions to HSAs can be made as part of an Internal Revenue Code (IRC) section 125 plan (a cafeteria plan) or offered as a separate benefit, which then requires the employer to follow comparability rules as to the contribution amounts. Because HRAs are employer funded, they cannot be part of a cafeteria plan.
Timing of Contributions and Portability
An important consideration for an employer is when to make employer contributions to an HRA or HSA available to its employees. For both offerings, the employer can make the full designated amount of funds available to eligible employees at the beginning of the year or in installments throughout the year.
Portability may play a large part in that decision. HRAs do not offer portability if an employee terminates employment. HSAs, on the other hand, are owned by the employee and are portable if the employee leaves employment. The HSA account is owned by the employee to use, or save for future use, as the employee chooses.
Front loading contributions may make more sense in an HRA. The employee will have access to the funds throughout the year, but would only be able to use the funds for services incurred prior to termination if the employee does not remain for the full year. And remaining contributions may be forfeited, subject to Consolidated Omnibus Budget Reconciliation Act (COBRA) continuation rules.
If the employer makes an employer contribution in a lump sum at the beginning of the year to an HSA, it cannot take back any contributions if an employee leaves employment during the year. Once deposited, the HSA money belongs to the employee.
Another option for employers offering an HSA is to provide employer HSA matching contributions, similar to a 401(k) as a way to incentivize employees to contribute themselves. An employer that wants to match HSA contributions up to a certain dollar amount or percentage, can deposit the amounts monthly or each pay period. This provides a balanced approach to access for employees, but helps mitigate the employer’s risk against employee termination.
An employer can allow unused balances in an HRA to carry over from year to year, but this is not required. Any unused amounts at the end of the year are forfeited, saving the employer money. If a carry-over is put in place, the HRA loses this potential cost savings advantage over an HSA.
COBRA Considerations
Another difference is in COBRA rights. If the employer is subject to COBRA, COBRA must be offered on the HRA to the employee and their dependents upon a qualifying event and a loss of coverage under the HRA. If COBRA coverage is purchased, the former employee will have access to his or her HRA balance and any account credits that would be received for the coverage period by a similarly situated non-COBRA beneficiary. Because an HSA is not an employer plan, an employee has no right to COBRA continuation coverage upon no longer participating in the HSA.
Whether an employer opts for an HSA or an HRA, both are attractive tax-favored benefits to offer employees to help them cover the ever-increasing cost of health expenses. To learn more about both offerings and other tax favored health plans, see IRS publication 969 or reach out to someone on the Bricker Graydon Employee Benefits Team.
