HRAs and HSAs: how they work and when to use both

Executive overview

Employers have two main tools for helping employees manage medical expenses: Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs). Each has distinct funding rules, tax structures, and portability implications. Used together under the right conditions, they can cover a broader range of healthcare costs than either alone.

The right pairing is an LP HRA plus an HSA — but only if plan designs don't overlap.

Key differences across categories

• HRAs are employer-funded; contributions are tax-deductible for the company
• Employees receive HRA reimbursements tax-free
• HSAs offer a triple tax advantage: contributions deductible, growth tax-free, withdrawals tax-free for qualified expenses
• HRA eligibility depends on enrollment in an employer-qualifying health plan
• HSA eligibility requires a high-deductible health plan (HDHP): minimum $1,650 deductible (individual) or $3,300 (family) in 2025
• Standard HRAs have no fixed IRS contribution cap; QSEHRAs are capped at $6,350 (self-only) in 2025
• HSA limits for 2025: $4,300 individual, $8,550 family; $1,000 catch-up for age 55+
• HRA rollover depends on employer plan design; many require funds used within the calendar year
• HSA funds roll over indefinitely and belong to the employee permanently
• HRAs are forfeited on departure unless a retiree HRA option exists; HSAs stay with the employee

Using HRAs and HSAs together

• A standard HRA can disqualify an employee from contributing to an HSA
• Limited-purpose HRAs (LP HRAs) are designed to complement HSAs — they cover dental, vision, and preventive care only
• The HSA then covers broader medical costs (prescriptions, deductibles)
• Coverage must not overlap; plan design must follow IRS guidelines
• Employers who want to offer both need careful coordination to preserve HSA eligibility