HRA vs. HSA: Which is best for me?

Comparing Health Reimbursement Arrangements with Health Savings Accounts

by Tony Novak, MBA, MT, OnlineAdviser at Freedom Benefits, last updated on 11/29/2011

Two types of cost-saving health plans jockey for the attention of small businesses attempting to revise their small group health plans.

Both of these plans can significantly cut costs and improve health plan quality for small businesses. But the two plans are very different in suitability and fit for specific business purposes.

HSAs require a specific type of health insurance that is not available to everyone. In fact, more than half of the people who apply for a HSA plan are not accepted at standard rates. These who do not qualify for the health insurance do not qualify for the tax-free savings account. Only healthy people without significant medical history find HSA plans to be a bargain. HRAs do not require any type of health insurance.

HSAs are best for sole proprietors, partners and owners of S-corporations because this is the only plan that will allow a business tax deduction in advance of actually incurring any health claims. HSAs can even be used as a tax shelter in this regard. HRAs are not available to this group of business owners.

HSAs do not work well when converting group coverage for employees from a group HMO plan. Employees tend to become accustomed to the mindset of how an HMO works, and HSA work exactly in the opposite way. It is not an issue of one plan being better or worse, but rather the fact that employees strongly resist changes of this magnitude in their benefit plan. The amount of money that may be saved in changing plans is probably not worth the pile of complaints employees will pour on the boss.

When a business pays most of the cost of health coverage for employees, the HRA plan will almost always save money and make the employees happier than a HSA plan or traditional health plan.

Both the HSA and the HRA may be used in conjunction with a Section 125 Cafeteria plan, but the suitability will be determined by the size of the business and the degree of reliance on employer contributions vs. employee voluntary contributions. This should be taken up on a case-to-case basis.

In summary, HSAs tend to work best for healthy self-employed individuals while HRAs work best when an employer pays for health benefits for employees. In many cases a combination of both is the best option and this combination may be easily managed through the use of affordable professional online benefits administrative services.

Freedom Benefits provides OnlineAdviser assistance for HSA plan enrollments through www.healthsavingsaccount-hsa.com and HRA plan enrollments through www.FreedomBenefits.org .

Tony Novak is a member of the Pennsylvania Institute of Certified Public Accountants, the New Jersey Society of Certified Public Accountants and an accredited member of the Better Business Bureau.

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