Choosing the right health benefits isn’t just a checkbox during open enrollment, it’s a strategic decision that can shape employee satisfaction and long-term organizational health. Many employers find themselves weighing the pros and cons of Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs), wondering which option truly fits their workforce.
HRAs are employer-funded accounts that offer flexibility beyond covering out-of-pocket costs like deductibles and coinsurance.
HSAs, on the other hand, are tied to High-Deductible Health Plans (HDHPs) and funded by employees, though employers can contribute too.
The best choice depends on your organization’s needs. Are you supporting a younger workforce that values portability and savings? Or do you have employees who would benefit more from employer-funded coverage with fewer out-of-pocket costs? Understanding your demographics, budget and goals is key to building a benefits strategy that works.
What is a Health Reimbursement Arrangement (HRA)?
At its most basic, an HRA is an employer-funded plan that reimburses employees for qualified medical expenses. These expenses might include premiums, copays, doctor visits and prescriptions.
Employers have lots of flexibility when they set up an HRA, and can design them based on their specific organizational needs. Employers set how much they will contribute as well as which expenses are eligible.
Key features of an HRA include:
- Funded solely by the employer
- Unused funds may roll over, depending on the plan
- No High-Deductible Health Plan (HDHP) is required
HRAs are funded by employer contributions. This can be appealing to many employees, especially those on limited budgets.
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What is a Health Savings Account (HSA)?
An HSA is a tax-advantaged account that both employees and employers can fund. To qualify, employees must enroll in a High-Deductible Health Plan (HDHP).
The funds in an HSA grow tax-free, and can be used, tax free, for qualified medical expenses. Unspent money rolls over each year, building over time.
Key aspects of an HSA include:
- Employee contributions are tax-deductible
- They require enrollment in an HDHP
- Funds are portable and stay with the employee
- Employees can invest their HSA funds
One of the biggest advantages of an HSA is its flexibility, not just in how funds are used, but in how they grow over time. Unlike HRAs, HSA funds can be invested, giving employees the opportunity to build long-term savings for future healthcare costs. This investment potential makes HSAs a powerful tool for financial wellness and retirement planning.
Another key feature is portability. The money in an HSA belongs to the employee, not the employer. If someone changes jobs or retires, their HSA goes with them. That’s why many employees choose not to spend their HSA funds right away. Instead, they treat the HSA like a healthcare-focused retirement account, letting it grow tax-free over time.
While HSA funds are intended for qualified medical expenses, they don’t have to be used that way forever. Once an account holder turns 65, they can withdraw HSA funds for any purpose, not just medical. If the money is used for non-medical expenses after age 65, it’s taxed as regular income, but there’s no penalty. This makes HSAs even more appealing as part of a broader retirement strategy.
HRA vs. HSA: key differences
HRAs and HSAs serve different functions within employee benefits programs. Both have the potential to enhance employee satisfaction, while each offers its own set of unique features.
One of the most notable differences is in plan requirements. To open an HSA, you need to be enrolled in a High-Deductible Health Plan. HDHPs have more up front, out-of-pocket expenses and the HSA is designed to help offset some of those costs.
HRAs have no such requirement, offering more flexibility. It’s a smart way to support a workforce that isn’t one-size-fits-all. It’s also helpful when your organization includes people with different healthcare needs and life situations.
Here are some key differences between an HRA and HSA:
- Funding Source: HRA is fully employer-funded; HSA allows employee and employer contributions.
- Ownership: HRA funds stay with the employer; HSA funds belong to the employee.
- Plan Requirements: HSA requires HDHP; HRA does not.
- Portability: HRAs do not follow the employee when they change employers, while HSAs are “portable” — they move with the employee as they change employers.
Whether your organization chooses an HRA or HSA, it helps to step back and think about what your employees need most and how that is supported by your benefits design.
Tax benefits and contribution rules
Both HRAs and HSAs come with valuable tax perks, but they work in different ways. HSAs stand out with a triple tax advantage: Money goes in tax-free, grows tax-free, and can be spent tax-free on qualified medical expenses. That kind of flexibility makes HSAs a popular choice for employees and a smart investment for employers looking to boost their health benefits strategy.
Though HRAs do not offer a direct tax advantage for employees, contributions are tax-deductible for employers. Reimbursements from an HRA are not counted as taxable income.
Here's a summary of tax benefits and rules:
| Account Type | Tax Benefit Type | Details |
| HSA | Triple Tax Advantage |
|
| HRA | Employer Tax Advantage |
|
Portability, ownership, and rollover
Another aspect of HRAs and HSAs is who owns the money. With an HSA, the account belongs to the employee, not the employer. That means if someone leaves the company, their HSA goes with them. It’s a portable, long-term way to save for healthcare expenses, which makes it especially appealing for employees who want more control over their benefits.
On the other hand, HRAs do not have this portability feature. Since HRA funds are tied to the employer and they do not follow the employee upon leaving the company. This limits long-term planning for employees and could influence their satisfaction and retention.
Regarding the rollover of funds, both accounts differ significantly:
- HSA rollover: Unused funds roll over year to year.
- HRA rollover: Rollover depends on employer plan design; not guaranteed.
Flexibility and plan design for employers
HRAs offer a high level of flexibility for employee benefits plan design. Employers can tailor these accounts to cover specific health insurance expenses, providing a strategic advantage. This customization helps align benefits with the unique needs of the workforce, aiding both new hires and long-standing employees.
HSAs may offer less flexibility in plan design, but they pair with HDHPs, which are often more affordable for employers. Employees gain access to a powerful budgeting and tax savings tool as well as the opportunity to invest for long-term growth, while organizations manage healthcare costs more efficiently.
This combination supports savings and encourages employees to be more conscious of their healthcare spending. The dual approach can promote healthier behavior and financial planning within the organization.
Employers should consider the following when choosing between HRAs and HSAs:
- Specific workforce health needs.
- Desire for flexibility in benefits design.
- Long-term cost management strategies that may be better addressed with HDHPs.
Which is right for your workforce?
Deciding between an HRA and an HSA starts with understanding your people. Think about the mix of ages, health conditions, and income levels across your workforce. Employees with regular health care or prescription needs, especially early in the year, like the immediate access to HRA funds. Others may benefit more from the portability of an HSA. Matching your benefits to your people helps create a plan that works for them and for your organization.
HRAs might suit companies with a diverse workforce seeking tailored plan designs. They allow employers to address specific employee needs through customized reimbursement structures. This could improve workforce satisfaction and retention. HRAs may be a good choice for a lower wage workforce that struggle.
Take a look at your own research, but it’s possible that HRAs may be a good choice for a diverse workforce without a lot of disposable income.
HSAs are well-suited for financially savvy employees, promoting long-term health savings and investment. They also provide an opportunity to inform employees about the advantages of long-term financial planning.
Factors to evaluate include:
- Employee demographics and preferences
- Financial literacy levels
- Long-term benefit goals
Making the best choice for your organization — HSAs or HRAs?
Developing a strong health benefits package requires understanding your workforce and matching their needs to the account (HSA or HRA) that best meets their unique needs.
Engage with employees to gather input and understand their preferences. This feedback can help you tailor packages that align with your employee needs and organizational goals while increasing employee satisfaction.
Consider these steps:
- Understand your expected health care cost trends and budgetary requirements
- Seek employee feedback on needs and preferences
- Assess health plan design choices that balance affordability for employees with cost management for employers
How Alight can help you make the right choice for your health reimbursement strategy
Choosing between an HSA, an HRA or any other reimbursement account isn’t an easy task, but you don’t have to tackle this project alone. At Alight, we help employers create benefits strategies that truly fit their workforce.
Whether you’re navigating eligibility rules, tax advantages, or employee communication, our team brings clarity and confidence to the process. With deep expertise and smart technology, Alight makes it easier to align your health benefits with your people’s needs, so you can support wellbeing, boost engagement, and drive long-term value.
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