Benefits Basics: HRAs

Choosing the right health coverage plan can be difficult, but a health reimbursement arrangement (HRA) can be a great way to leverage employer contributions for member health care expenses.

What are HRAs?

HRAs are employer-funded arrangements that reimburse employees for certain medical expenses. Typically, an employer can only offer an HRA to employees with a group health plan, often a high deductible health plan (HDHP). Employers determine the amount of money available in the HRA, which is typically an amount less than the annual health plan deductible.

One of the reasons why HRAs were created was to help employees be more aware of their health care expenses while helping them meet their deductibles with tax-free health funds. The IRS provided an official definition of HRAs in 2002, and HRAs underwent other regulatory changes with the Affordable Care Act (ACA), which now generally prohibits standalone HRAs that are not integrated with an ACA-compliant group health plan.

HRAs can be a great way for members to pay for out-of-pocket health care expenses while still working down their deductible, especially if they are enrolled in a high-deductible health plan.

Why Have an HRA?

HRAs provide a tax-free, employer-funded amount of money for health care expenses. These arrangements are a great way to pay for out-of-pocket qualified medical expenses before meeting the deductible.

HRA Advantages

If your employer offers an HRA, it can be a tremendous advantage as members pay out-of-pocket medical expenses, especially with an HDHP. HRAs offer several benefits:

Tax Savings

• Employer’s contributions to your HRA can be excluded from gross income, meaning employees don’t pay taxes on that money.
• Reimbursements from an HRA are tax-free when used to pay for qualified medical expenses (which are the only expenses they can be used for).

Out-of-Pocket Expense Reduction

• Often paired with an HDHP, reimbursement from am HRA will make it much easier to meet deductibles while taking advantage of a health plan with lower premiums.

Accrued Balance

• Depending on an employer’s plan, unused amounts in the HRA may be carried forward for reimbursements in later years.

Is an HRA Right for Your Members?

An HRA can prove to be advantageous for employees who don’t want to reduce their salary through a salary deferral to fund an account, such as with health savings accounts (HSAs) and health flexible spending accounts (FSAs). This account type is entirely employer-funded, essentially boosting employee salary with tax-free money for health care expenses.

However, HRAs give members less flexibility than an HSA or FSA—with those accounts, employees can choose how much they want to contribute to the account.  Although members can’t choose how much money will be contributed to an HRA, these arrangements are still a great way to reduce out-of-pocket health expenses for employees and their families.

If you have any questions on structuring a health plan to include an HRA, or any other tax-advantaged account, don’t hesitate to reach out by clicking the link below.

Some content courtesy of our friends at Zywave.