HRA vs. HSA for Self-Employed
Wednesday, July 1st, 2009
This comparison has been designed with the typical HRA self-employed business owner in mind. With increasing health care costs, self-employed business owners are looking to consumer-driven health plans, such as the MSA, HRA, HSA, and FSA. Below you willfind information on the HSA and HRA to help you understand the difference between two of the more popular consumer driven plans. Health Reimbursement Arrangement (HRA) and Health Savings Account(HSA).
Overview
- HRA - An employer funded benefit plan,without any salary reduction, thatreimburses employees for qualifiedmedical expenses. The HRA was created in 1954and over the last 50 years hasbeen thoroughly reviewed,clarified and tested.
- HSA - An account created inconjunction with a High Deductible Health Plan (HDHP) to pay for qualified medical expenses.√ The HSA was created in late 2003 and many clarifications are still pending.
Eligibility
- HRA - Any employee that satisfies the employer established non-discrimination rules under IRC§ 105(h). The HRA does not require a HDHP. None.
- HSA - Any individual covered under aqualifying HDHP and notqualified for Medicare or underanother non-qualifying healthplan.√ Must have a qualifying HDHP.
Health Plan Requirements
- HRA - None. The HRA will work with anyHealth Insurance policy,regardless of deductibleamounts and out of pocketmaximums.
- HSA - For individual coverage anannual deductible no less than$1000 with a maximum annualout of pocket limit of no morethan $5250. For familycoverage an annual deductibleno less than $2000 with anannual out of pocket limit of no more than $10,500.√
Funding
- HRA - Employer funded. Employer controls benefitdollar amounts of the HRA.
- HSA - Employer and/or employeefunded.
ContributionLimits
- HRA - Unlimited*.
- HSA - *Within plan parameters.100 % of the deductible or$2700/$5450*, whichever is less.
*Born before 1952, add $700.
- The HSA is restricted to amaximum funding of$2700/$5450(individual/family) per year.
- Tax Treatment HSA Contributions from the Employer are Deductible by the employer.
- Employee Non-taxable to the employee.EmployerEmployerportion is non-taxable to the employee and deductible byt he employer. Employee Employee funding is typically a post-tax contribution and deductible as a personal expense on the 1040.
HRA is 100% deductible from a federal, state, and self-employment taxes standpoint. Non-Discrimination Requirements Subject to non-discrimination requirements under §105(h). Employer must make“comparable” contributions for all employees.
With an HRA, the employerhas the ability to excludecertain employees (i.e. Part-time, Age, Length of service)Allowed BenefitsReimbursement of qualified healthinsurance premiums and medicalexpenses under § 213 (includingOTC drugs).Reimbursement of qualifiedmedical expenses under § 213(including OTC drugs). NOhealth insurance premiums.√Health Insurance premiumsare also deductible with theHRA.Carry overUnused funds may be carriedforward to subsequent years.Unused funds may be carriedforward to subsequent years.√HSA funds may be investedand earn interest non-taxable.AdministrationGenerally self-administered orTPA.Funds held by qualifying trustee(ie. bank, insurance company,etc.), directed by individual.√With the HRA, funds are nottransferred to/from a thirdparty (ie. bank, insurancecompany, etc.).* S-corporation shareholder employees exempt from FICA tax onlyNOTE: Insurance regulations may prohibit the reimbursement of health insurance premiums in your state. For additional details, please contact a BASE® Benefit Specialist.M:REV_BASE_3/5/07
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HSA or HRA…What is the Real Difference?HSA1) Must have a high deductible HSA compliant health insurance policy.A. Health insurance premiums are not deductible as a business expense.B. Premiums may be deductible on the 1040 as a personal expense.2) Must have a separate Trust account* that the client deposits money in throughout the year. These deposits are tax deductible from federal and state income tax, and can be withdrawn to cover non-premium medical expenses.*Some expenses that can be paid from the Trust account include: Chiropractor fees, Contact lenses, Crutches, Dental treatment, Drugs (prescription), Eyeglasses, Hearing aids, Hospital services, Laboratory fees, etc. Note: Health insurance premiums are excluded.HRA1) Any health insurance policy will work with the HRA.2) All family related medical expenses that occur including health insurance premiums and any IRC Section 213 medical expense are deductible as a business expense with the HRA, saving federal, state, and self-employment tax.Examples of tax savings with the HSA and HRA:Assuming a self-employed sole proprietor with a family of four has a $2,500 deductible health plan and $4,800 in yearly health insurance premiums (the national average for BASE clients). Their maximum HSA contribution is $2,500 and they have $6,400 in actual out-of-pocket expenses (the national average for BASE clients).If your clients’ business qualifies for the HRA, there are substantially more tax dollars to be saved by having them utilize the HRA.NOTE: Insurance regulations may prohibit the reimbursement of health insurance premiums in your state. For additional details, please contact a BASE®Benefit Specialist.HSAPremiums $4,800HSA Contribution $2,5001040 Deduction $7,300x 20%(15% Federal + 5% State)Tax Savings $1,460HRAPremiums $4,800OOP Expenses $6,400Schedule C Deduction $11,200x 35.3%(15% Federal + 5% State + 15.3% Self-Employment)Tax Savings $3,953MRev_3/2007
