In 2024, health insurance premiums jumped 6% for single coverage and 7% for family coverage, outpacing wage growth (4.5%) and inflation (3.2%). Meanwhile, only 53% of small firms offer health benefits compared to 98% of large firms. This cost pressure makes choosing between an HRA vs. HSA a critical decision.
What you’ll learn
What you’ll learn
Updated: August 8, 2025
Key takeaways
- HRAs give you control over funds, contribution amounts, and unused money when employees leave
- HSAs travel with employees forever, making them valuable for retention, as all contributions become permanent employee assets
- Tax benefits work differently for each account, but HSAs can offer greater savings when employees contribute their own money
- Only HSAs allow for investing, appealing to younger workers seeking to build long-term wealth
Both accounts help workers pay medical expenses with tax advantages, but they work differently. One stays with your company, the other travels with your employee.
In this employer’s guide, we’ll discuss how each works and familiarize you with the features so you can find the right match for your business.
Is it better to have an HRA or HSA? Here’s how to decide
The HRA vs. HSA question depends on your business goals and the needs of your employees. An HRA gives you complete control over healthcare spending and works with any insurance plan. An HSA requires employees to have a health savings account, but offers powerful long-term savings potential.
Most small businesses tend to opt for HRAs due to their cost control and simplicity. You decide how much to contribute, when to contribute, and what gets reimbursed. HSAs work better when you want to attract employees who value building wealth through tax-advantaged accounts. In fact, from 2024 to 2025, adoption of ICHRA health insurance grew 34% among large employers, with 92% sticking with HRAs year over year.
The table below breaks down what each plan type has to offer.
| Feature | HRA (Health Reimbursement Arrangement) | HSA (Health Savings Account) |
| Who funds it: | Employer only | Employer and/or employee |
| Who owns it: | Employer | Employee |
| 2025 contribution limits: | Varies by HRA type (QSEHRA: $6,350 single/$12,800 family) | $4,300 single/$8,550 family |
| Portability: | Stays with employer | Fully portable |
| Investment options: | None | Yes, after minimum balance |
| Eligible health plans: | Any plan | High-deductible health plan only |
| Rollover rules: | Employer decides | Unlimited rollover |
Contribution limits: What can you offer employees this year?
IRS contribution caps differ for each account. Knowing these limits helps you budget effectively.
HRA contribution limits for 2025:
- QSEHRA (for businesses without group health insurance): $6,350 for single coverage, $12,800 for family coverage
- ICHRA: No federal limits, but must be “affordable” relative to marketplace plans
- Excepted benefit HRA: $2,150 annually
HSA contribution limits for 2025:
- Individual coverage: $4,300
- Family coverage: $8,550
- Catch-up contribution (age 55+): Additional $1,000
Your HRA budget stays flexible within these limits. You can contribute $2,000 one year and $5,000 the next, within annual IRS caps. HSA contribution limits get locked in annually, and employees can max out their own contributions even if you don’t contribute anything.
How employees use the funds (and what you can reimburse)
Both accounts cover the same qualified medical expenses: doctor visits, prescriptions, dental care, vision care, and most other healthcare costs. The difference lies in timing and process.
HRAs work on reimbursement. Employees pay out of pocket first, submit their receipts, and then receive reimbursement. You can add extra rules, such as requiring generic drugs or pre-approval for expensive treatments. Nearly 70% of employees with HRAs opt for Gold or Silver health plans, which provide them with solid coverage and reimbursement support.
HSAs work like debit cards. Employees spend directly from their account balance. They can also pay out of pocket and reimburse themselves years later (as long as they keep receipts).
Tax advantages for your business
Both accounts deliver solid tax benefits, but differently:
HRA tax benefits
- 100% deductible as a business expense
- No payroll taxes on contributions
- Reduces your overall tax liability dollar for dollar
HSA tax benefits
- Deductible contributions (if you contribute)
- No payroll taxes on contributions
- Employees get tax deductions too (creating goodwill)
The HRA vs. HSA comparison shows that HSAs can save you more in payroll taxes. When employees contribute their own money, they save 7.65% in FICA taxes on their reduced taxable wages.
Should offering health benefits be on your to-do list? A recent OnPay survey found that nearly 60% of small businesses offer this type of insurance (see graph below and link to the entire study).
Investment options: Does it matter for employers?
HSAs allow investment options once the account balance reaches a minimum threshold (usually $1,000 to $2,000). Employees can invest in mutual funds, stocks, and bonds, potentially growing their healthcare dollars over decades.
Only 15% of HSA holders actively invest their funds. However, employer contributions significantly increase the likelihood that employees will engage in investment activities. This means your HSA contributions may encourage long-term financial planning.
HRAs don’t offer investments. The money sits in your account, earning minimal interest until employees request reimbursements.
For employers, HSAs help attract and retain financially savvy workers. The investment component especially appeals to remote teams and tech workers who prioritize financial planning tools. Younger employees typically prefer HSAs for wealth-building potential. Older employees with regular medical expenses often prefer HRAs for immediate cost relief.
Can you offer both an HRA and HSA? (yes, with limits)
You can combine certain HRA types with HSAs, but carefully. The IRS allows “limited purpose HRAs” that only cover dental, vision, and post-deductible medical expenses. You can also offer an HRA that starts after an employee’s HSA deductible is met.
Popular combinations include:
- HSA plus limited purpose HRA for dental and vision
- HSA plus post-deductible HRA for major medical expenses
- HSA during active employment, HRA for retirees
This strategy is well-suited for companies seeking to maximize tax advantages while covering a broader range of employee healthcare costs. However, the compliance requirements quickly get complex. You’ll need a careful plan design and administration.
The QSEHRA and ICHRA rules introduce an additional layer of complexity when combining plans. Getting professional guidance prevents costly mistakes.
“I appreciate the simplicity while still having a wide range of features. The customer service is great too, and the peace of mind is invaluable. Pay runs are simple to do and I don’t have to worry about dealing with record-keeping for taxes, health insurance payments, or retirement benefits.”
— Byron K., Dermatology & Skin Care Center
Compliance made simple: What you need to track and report
Both accounts require specific documentation to stay compliant. Most requirements are straightforward.
HRA compliance requirements:
- Provide Summary Plan Description to employees
- File Form 5500 (if you have 100+ participants)
- Issue reimbursement statements
- Maintain Health Insurance Portability and Accountability Act (HIPAA) privacy protections
- Track contribution limits by employee
HSA compliance requirements:
- Report employer contributions on employees’ W-2s (Box 12, Code W)
- Verify employees have qualifying high-deductible health plans
- Make sure contribution limits aren’t exceeded
- Maintain records of HSA eligibility
From a compliance standpoint, the pros and cons of HRA vs. HSA favor HRAs due to their simplicity. You handle everything internally. HSAs require coordination with external HSA administrators and more payroll reporting.
Both options require you to understand the requirements for offering employee benefits and maintain proper documentation for audits. Missing deadlines or filing incorrect forms can result in penalties.
Documentation becomes important when you’re offering these benefits alongside group health insurance or other employee health plans. Large employers may also need to consider filing Form 1095-C requirements when providing health coverage.
HRA or HSA both have positives for employees
HRAs and HSAs are both opportunities to help employees take care of their health while keeping costs from getting out of control. Just keep in mind that manually managing these benefits creates compliance risks. To prevent the extra administrative work from becoming a burden, many payroll platforms automate the tracking of contribution limits, reimbursement processing, report generation, and accurate tax calculations.
Ready to simplify employee benefits management? OnPay’s payroll software handles HSA contributions through direct payroll deduction, automatically updates W-2 reporting, and integrates with popular providers. For HRAs, the platform tracks reimbursements and maintains compliance documentation.
Handling HRA and HSA administration can be simple, so you can focus on growing your business instead of wrestling with benefits paperwork.
Take a tour to see how easy payroll can be.
Jon Davis is the Sr. Content Marketing Manager at OnPay. He has over 15 years of experience writing for small and growing businesses. Jon lives and works in Atlanta.