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Do you offer your early retirees the option of continuing on your health insurance plan? Don’t make this mistake!

Many schools, cities and counties offer early retirees the option to continue on their group health insurance plan. They may also consider using a High Deductible Health Plan with an HSA (Health Savings Account). However, using an HSA may be a mistake. Here’s why.

While HSA balances can be used into early retirement for eligible health care expenses like deductibles, co-pays, prescription drugs, eyeglasses, dental expenses and other medical expenses, there is one very important thing that it cannot be used for. The HSA cannot be used to reimburse medical insurance premiums prior to age 65. Given that many schools, cities and counties allow employees to retire early, prior to 65, and that retirees have access to more quality health plans than ever before, this is a major drawback.

A better option may be a funded HRA (Health Reimbursement Arrangement). An HRA is very similar to an HSA. Both plans allow employers to deposit funds on behalf of the participant. Both plans are designed so that funds carry over year-to-year. And both plans earn interest tax-free and are used tax-free for qualifying medical expenses. And while both cover eligible health care expenses, many schools, cities and counties across the country have found HRAs to be a better fit than HSAs for their employees due to the fact that the HRA can be used to reimburse retiree health insurance premiums. In fact, eligible HRA premium payments include health, dental, vision and long-term care insurance, as well as Medicare B, C, D and Medicare Supplements. The ability to use accumulated HRA funds tax-free for premiums once retired increases consumerism, bending the claims-related cost curve going forward.

To learn more about why an HRA may work better for you than an HSA, check out our white paper.

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Erin Woulfe
Erin Woulfe
Erin Woulfe likes to write about things that matter. Keeping her finger on the pulse of what’s happening in the public sector world, she blogs about the latest legislative news and employee benefit trends that affect our school, city and county clients. She’s been with NIS since 2002. “I love connecting to our clients and providing them with the tools they need in order to administrate their plan,” says Erin. “Whether that be materials to educate their employees on certain benefits, how to effectively communicate change within an organization or just providing tips and how-to’s to help them make their job easier.”


  1. You are correct. However, HRA vs HSA isn’t necessarily an “either/or” strategy. In fact, the best option would be for the employer to offer BOTH; i.e., an HSA-compatible plan with both VEBA and HSA. That way, the employee/early retiree can direct their employer’s funds into their VEBA account and make their own contributions to an HSA. That way, they can benefit by having both health care savings accounts.

    • Diane K says:

      Excellent point. With the high cost of premiums, an employer may not be able to contribute much to an HRA. The HSA enables the employee to be the “driver”, contributing to the account on a tax-free basis – in addition to – any employer contributions, ensuring a savings account for the future. The HRA provides a valuable savings account only if the employer adequately funds it.

  2. David Branback says:

    I agree an employer can offer two HDHP plans one with a HSA and one with an HRA (VEBA) however an individual employee can not contribute to a HSA if the employer is contributing to an HRA on their behalf unless the HRA is limited purpose, post deductible, or access suspended. To be eligible for a HSA you can not be covered by a non-QHDHP. A HRA would disqualify HSA contributions. However with HRA the employee can continue FSA contributions.

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