A health reimbursement arrangement (HRA) is an employer-funded plan that reimburses employees for qualified medical expenses and, in some cases, insurance premiums. Employers can claim tax deductions for the reimbursements, and employees receive tax-free reimbursement dollars. Explore the various types of HRAs, their benefits, limitations, and how they compare to other healthcare funding options in this comprehensive guide.
What is a health reimbursement arrangement (HRA)?
A health reimbursement arrangement (HRA) is an employer-funded plan designed to reimburse employees for medical expenses and insurance premiums. Employers can claim tax deductions for these reimbursements, and employees receive them tax-free. In this article, we delve into the details of HRAs, including types, benefits, and limitations.
Understanding how a health reimbursement arrangement (HRA) works
An HRA is an employer-established plan to cover employees’ medical expenses. Employers decide the funding, and employees can seek reimbursement for eligible expenses up to the allocated amount. However, HRAs are not accounts for pre-emptive withdrawals. Reimbursements occur after incurring expenses. Some HRAs offer debit cards for instant reimbursement.
If an employee depletes HRA funds before year-end, they may need to cover subsequent health bills out-of-pocket or with other accounts like a flexible spending account (FSA) or health savings account (HSA).
Types of HRAs
HRAs come in various types, catering to different employee needs:
Qualified small employer health reimbursement arrangement (QSEHRA)
For businesses with fewer than 50 full-time workers, a QSEHRA helps offset health insurance costs or medical expenses. Yearly limits, set by the IRS, determine reimbursement amounts. Reimbursements are tax-free for employees and tax-deductible for employers.
Individual coverage HRA (ICHRA)
Introduced in 2020, an ICHRA allows employees to buy individual health insurance with pre-tax dollars. It covers copayments, deductibles, and other qualified health expenses. Eligibility for premium tax credits depends on “affordability” standards and opting in or out of Affordable Care Act coverage.
Excepted benefit HRAs (EBHRA)
Employers offering group health insurance can provide EBHRAs for up to $1,950 a year in qualified medical expenses. Funds can be used for short-term health insurance, dental and vision premiums, and medical expenses.
Benefits and limitations of health reimbursement arrangements
Here is a list of the benefits and the drawbacks to consider.
- It can be used for medical and dental expenses, including prescription medications and annual exams.
- Allows employees to pay for individual health insurance with pre-tax dollars.
- Reimburses employees after paying for qualified medical expenses and insurance premiums.
- Cannot cover unnecessary costs like teeth whitening, funeral services, or non-prescription medication.
- Employers determine contribution amounts and plan structure.
- Requires paying expenses first and then waiting for reimbursement.
HRAs offer benefits like covering essential medical expenses and allowing employees to purchase health insurance with tax advantages. However, limitations include exclusions of non-essential expenses and employer control over funding and plan design.
Comparing health reimbursement arrangements to other arrangements
When comparing HRAs to other options like flexible spending accounts (FSAs) and health savings accounts (HSAs), it’s important to understand how they interact. Employees with both an FSA and an HRA can’t choose which plan covers a specific expense—the primary plan designated by the employer dictates coverage.
Flexible spending arrangement (FSA)
An FSA allows employees to allocate pre-tax money from salaries to cover medical expenses up to a limit. Unlike HRAs, employees determine the contribution. Unused HRA funds may roll over, but unused FSA funds generally don’t carry over.
Health savings account (HSA)
An HSA is a tax-advantaged account paired with a high-deductible health plan (HDHP). It covers medical and dental expenses, with vested and portable contributions. Unlike HRAs and FSAs, HSAs can’t pay insurance premiums.
Maximizing HRA funds for eligible expenses
HRAs offer flexibility regarding eligible expenses, but it’s crucial to understand coverage. While employer-set guidelines determine services, some HRAs also cover dental, vision, or pharmacy costs.
HRAs may reimburse additional expenses such as copays, hospital costs, medical equipment, eyeglasses, and routine doctor visits. Exclusions defined by the IRS include non-essential expenses like teeth whitening, maternity clothes, and non-prescription medications.
HRA portability and tax advantages
HRAs are solely funded by employers, who set the maximum annual contribution per employee’s HRA. Unspent HRA funds may roll over, subject to employer-defined limits. Unlike health savings accounts (HSAs), HRAs are not portable, remaining with the employer if an employee changes jobs.
Reimbursements through HRAs offer benefits for employers and employees. Employers enjoy tax deductions, while funded plans provide cost predictability. Employees can cover various medical expenses not covered by insurance.
Frequently asked questions
What is a HRA in Health Insurance?
A health reimbursement arrangement (HRA) is an employer’s plan to cover employee medical expenses.
How Does a HRA Work?
The employer determines the funding, and employees can request reimbursement for qualified medical expenses up to the allocated amount. Employers can deduct reimbursements, and employees receive tax-free funds.
What is a HRA vs. a HSA?
A health reimbursement arrangement (HRA) reimburses employees for qualified medical expenses and premiums. A health savings account (HSA) is a tax-advantaged account for high-deductible health plan expenses.
Can I Cash out My HRA?
No. Unspent HRA funds at year-end can roll over, with employer-defined limits on carryover.
What Qualifies for HRA Reimbursement?
Qualified medical and dental expenses include annual check-ups, prescriptions, and substance abuse treatment.
- HRAs reimburse employees for qualified medical expenses and sometimes insurance premiums.
- Employers fund HRAs, which are not portable when employees leave the company.
- Government rules, refined by employers, determine eligible reimbursable expenses.
- Various HRAs may cover health insurance premiums, vision and dental premiums, and qualified medical expenses.
- An HRA is not an account; employees must incur the expense first and then have it reimbursed.
- HRAs have limitations and exclusions for non-essential expenses like teeth whitening and maternity clothes.
- Different HRAs exist, including QSEHRAs, ICHRAs, and EBHRAs, each with unique features.
- HRAs offer tax advantages for employers and tax-free reimbursements for employees.
- HRAs are compared to other healthcare funding options like FSAs and HSAs.
- Understanding eligible expenses is essential to maximize HRA funds.
- HRAs are not portable and remain with the employer if an employee changes jobs.
View Article Sources
- Health Reimbursement Arrangement (HRA) – Purdue University
- Health Reimbursement Arrangement – University of Rochester
- Health Reimbursement Arrangement (HRA) – Health Insurance Marketplace (Department of Health & Human Services)
- Health Reimbursement Arrangements – Centers for Medicare & Medicaid Services
- Expert Interview Series: Pat Jarrett of HealthSavings on the Benefits of Health Savings Accounts – SuperMoney
- Healthcare Law – SuperMoney