As a small business owner, navigating employee health benefits can be challenging. Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs) are two popular options that can help manage your team’s healthcare expenses, but which one is the best fit for your company? Let’s break down the differences between HRAs and HSAs to help you choose the right option for your business.
What is an HRA?
A Health Reimbursement Arrangement (HRA) is a benefit plan where employers provide tax-free funds to their employees to cover healthcare expenses such as deductibles, copays, and premiums. The employer determines the amount of money allocated to each employee, and any unused funds at the end of the year are returned to the company.
A specific type of HRA is the Individual Coverage Health Reimbursement Arrangement (ICHRA), which allows businesses of all sizes to reimburse employees for individual health insurance premiums. This plan offers small businesses a more affordable and flexible alternative to traditional group health insurance, giving employees the freedom to choose the health plan that best suits their needs.
What is an HSA?
A Health Savings Account (HSA) is a personal account where employees can set aside pre-tax money to pay for qualified medical expenses. Unlike an HRA, the HSA is owned by the employee, not the employer. Employees can invest their funds and carry them over from year to year, making it a long-term savings tool. To qualify for an HSA, employees must be enrolled in a high-deductible health plan (HDHP).
Pros and Cons of HRAs
Advantages of HRAs:
- Employer control: Employers have full control over how much they contribute to the HRA, offering a flexible approach to managing healthcare costs.
- No participation restrictions: Unlike HSAs, HRAs don’t require employees to have a high-deductible health plan, offering more flexibility.
- Unused funds revert: Any funds left unspent at the end of the year are returned to the employer, making it a budget-friendly option for businesses.
Disadvantages of HRAs:
- Limited employee control: While employees can use the funds for healthcare expenses, the employer sets the contributions and any unused funds go back to the company.
Pros and Cons of HSAs
Advantages of HSAs:
- Employee control: Employees own the account, giving them full control over how the funds are used and invested.
- Portability: HSAs are not tied to a specific employer, so employees can keep the account even if they change jobs.
- Tax advantages: Contributions to the HSA are tax-free, and funds grow tax-deferred, making it a long-term savings tool for healthcare.
Disadvantages of HSAs:
- Eligibility requirements: Employees need to be enrolled in a high-deductible health plan (HDHP) to qualify for an HSA, limiting its applicability.
- Management burden: Some employees may find managing their HSA, keeping track of receipts, and understanding what qualifies for reimbursement a bit cumbersome.
Which One is Best for Your Small Business?
Choosing between an HRA and an HSA depends on your business’s healthcare needs and financial goals. Here are two scenarios to consider:
- HSA is a great choice if:
- Your business already offers a high-deductible health plan (HDHP).
- You want to help employees cover out-of-pocket expenses such as deductibles and copayments.
- You want to give employees a long-term savings option for healthcare costs that they can take with them if they change jobs.
- HRA is a great choice if:
- Your business doesn’t offer health benefits or if you’re frustrated with the complexity or cost of group health insurance.
- You prefer a more budget-friendly option that allows employees to choose their own health insurance plan.
- You want to retain control over how much is allocated to each employee and ensure that unused funds stay within your business.
Bottom Line
Both HRAs and HSAs offer valuable benefits for small businesses looking to provide healthcare coverage to employees. By understanding the unique features and advantages of each, you can make an informed decision that aligns with your business needs and helps you attract and retain top talent.
