Which is most advantageous – an HRA or an HSA?

It depends on who you ask. One person I know has a high deductible plan with a $2,500 HRA funded by the employer.  As a participant, she loves the plan. The premium is moderate because of the high deductible, but because of the way the plan is structured, she never feels any high-deductible pain. The carrier administers the HRA plan and transfers money from it as needed to cover copays and deductibles. The participant rarely pays anything out of pocket. It’s a win-win. The money belongs to the employer but it’s available to the employee for this specific purpose.

But what happens if she terminates and elects COBRA? 

COBRA applies to the HRA itself. The employer still has to fund the HRA. And, the next year, if she remains on COBRA, the employer has to fund the HRA again – even though this person is no longer an employee.  In this case, the amount funded is $2,500, which is a lot of extra money to put out for someone who isn’t an employee. The HRA funds still belong to the employer. The COBRA participant can’t take the money and use it elsewhere. If the money isn’t used, it benefits the employer. So, from the COBRA administration side of things, HRAs are a bit complicated to track. 

What if this same plan used a Health Savings Account (HSA) instead of a Health Reimbursement Account (HRA)? From the plan participant angle, many of the same great advantages can exist with an HSA. Depending on how the plan was set up, the employee may have to submit receipts for reimbursement or use an HSA debit card rather than having the carrier oversee all the copay and deductible reimbursements.  The true difference appears if and when the employee terminates and elects COBRA.

When an employee with an HSA terminates, there is no right to COBRA on the HSA itself. The money in the HSA fund at the time of terminiation is hers to keep. The employer has no control over it and does not get it back if it goes unused. On the other hand, the employer does not have to fund it once the person is no longer an employee. If a year goes by and the participant remains on COBRA under the health plan, there’s no HSA to fund or administer.  So, from the COBRA administration viewpoint, HSAs are a much simpler option.

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