In terms of nonmedical use, how do HRAs and HSAs differ?

The correct choice highlights the key difference in terms of nonmedical use between Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs). HSAs can be used for nonmedical expenses, but if the account holder is under the age of 65, those withdrawals will incur penalties and taxes, thus discouraging nonmedical usage before that age. Once an individual reaches 65, they can use the funds without facing penalties, though they will still owe taxes on nonmedical withdrawals.

On the other hand, HRAs are employer-funded accounts that are primarily designed for medical expenses; they generally do not allow for nonmedical use. This means that any funds that are not used for qualified medical expenses may be forfeited.

This distinction illustrates that while HSAs offer some flexibility after age 65, HRAs do not provide that option, emphasizing their primary function in supporting healthcare costs rather than general financial needs.