Healthcare spending accounts, such as Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs), help people pay for qualified medical expenses. They also provide more control over how and where to pay for those expenses. Some employees may have simultaneous HRA and HSA eligibility through their employer or when combined with their spouse’s employment options. This duality raises an important question: “Can I have an HRA and HSA simultaneously?”
The answer is yes, you can under specific circumstances. Per IRS regulations, four special-purpose HRAs are compatible with simultaneous HSA ownership. To better understand how the accounts can work together, let’s look at the basics, compatible plan types, and the advantages of simultaneous enrollment.
The Basics of HRAs and HSAs
HRAs
HRAs are owned by and funded solely by the employer. The employer credits the HRA with a predetermined amount of money that you can use to pay for eligible medical expenses not covered by the company’s group health plan. Depending on the plan, unused HRA funds may be eligible for rollover from one plan year to the next but are not eligible for investment.
Currently, employers cannot offer traditional HRAs as stand-alone plans. Instead, they must integrate with a group health plan. In addition, the HRA is not portable when you leave the company since the employer owns it. Finally, any qualified amount you receive from an HRA does not count toward your taxable income.
HSAs
An HSA acts like a long-term savings account that you can use to pay for qualified health care expenses. To qualify to open and contribute to one you must enroll in an HSA-qualified high-deductible healthcare plan (HDHP). You cannot have any concurrent health insurance coverage that is not an HDHP.
HSA account owners set aside money pre-tax from each paycheck and then make withdrawals as needed to pay eligible expenses. The employer can also contribute to the account, but it is not a requirement.
Once you open an HSA account, you can build the balance in three ways:
- Making tax-free contributions
- Earning tax-free interest on the balance
- Earning tax-free returns from investing the balance
All unspent funds roll over from year to year. Unlike other tax-advantaged benefit accounts, an HSA is portable – you own the account and take it with you if you switch employers or retire. HSAs can also supplement retirement income since you can make withdrawals for any reason after age 65 without penalty. Withdrawals after age 65 to pay medical expenses remain tax-free; withdrawals for other reasons are taxed at your then-current tax rate, just like 401(k) withdrawals.
HRAs and HSAs at the Same Time
Four HSA-Compatible HRA Plan Types
Once all of the conditions outlined above are made, you can have both an HRA and an HSA simultaneously as long as the HRA is one of the following four types.
- Limited-Purpose HRA: Pays or reimburses only permitted coverage (including vision and dental), permitted insurance, or preventative care. These expenses do not count toward the HDHP deductible.
- Post-Deductible HRA: Pays or reimburses only for preventative care or medical expenses incurred after meeting the minimum annual HDHP deductible.
- Retirement HRA: Covers eligible expenses incurred after retirement.
- Suspended HRA: Before HRA coverage begins, you suspend your HRA by electing to forgo reimbursement for medical expenses incurred during the coverage period. As a result, you are HSA-eligible for covered expenses during the suspension period. The suspension does not apply to otherwise HRA-eligible expenses such as permitted insurance, permitted coverage, or preventive care.
Consult IRS Ruling 2004-45 for further guidance.
Advantages
Both HRAs and HSAs help you manage and pay for qualified medical expenses. Where regulations permit, having both accounts at the same time doubles your advantages:
- Tax-free, employer-funded account to pay for qualified medical expenses (HRA)
- Account funds can be used for a wide variety of healthcare expenses (HRA, HSA)
- Lower health insurance premiums (HDHP)
- Triple-tax benefits including pre-tax contributions, tax-free growth (interest and investment), and tax-free distributions for eligible expenses (HSA)
- Unspent funds roll over automatically and can be saved for retirement (HSA)
Medical expenses can be a burden for many families. Having an HRA and HSA simultaneously can relieve much of that burden while offering opportunities to add to your retirement nest egg. For more information, talk to your company’s HR department.
