What Is A Health Reimbursement Arrangement (HRA)?

When you begin a new job, your employer will likely present you with documentation outlining your benefits, which can often feel overwhelming.

Insurance terminology is frequently filled with acronyms, making it essential to grasp the concepts to select the best options for you and your family.

This article aims to clarify Health Reimbursement Arrangements (HRAs) so you can navigate your employer’s offerings and make informed choices about your healthcare plans.

Key Takeaways:

• A Health Reimbursement Arrangement (HRA) is a health benefit where an employer allocates funds for employees to apply toward their medical deductibles.

• An HRA is employer-owned, with specific guidelines established by the employer and the IRS regarding its usage.

• Various types of HRAs exist, including those where the employee pays first, the employer pays first, or a combination of both.

• HRAs are tax-exempt and can help cover medical expenses not included under standard insurance plans.

• Unlike Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs), HRAs are employer-controlled and stipulate when funds can be accessed.

What Is a Health Reimbursement Arrangement?

A Health Reimbursement Arrangement (HRA) is a monetary allocation from your employer intended to cover approved medical expenses that count towards your deductible.

Employers typically offer this benefit to help mitigate the financial burden of high deductibles for their employees.

How Does an HRA Work?

Employers contribute a specified amount of money to an account designated for eligible medical expenses. Since the employer owns the account, they set the rules for its use, in conjunction with IRS regulations.

Depending on the HRA type established by the employer, employees may need to pay a certain portion of the deductible before the HRA contributes or vice versa. Some plans may even split costs directly.

You can enroll in an HRA during your initial onboarding or during the annual open enrollment period while selecting your insurance packages. HRAs are often paired with high-deductible plans to assist in covering those costs.

Depending on your employer’s specifics, you might receive a payment card for direct medical expense transactions. Some firms reimburse you after payment, while others may pay healthcare providers directly.

Many employers allow unused HRA funds to roll over into the next year, although policies vary. Some HRAs also permit you to use funds for your dependents’ medical expenses, while others do not. Be sure to consult your HR representative for details on your company’s specific program.

Benefits and Limitations of an HRA

If your employer offers an HRA, consider the following advantages:

• Tax-Free Contributions. The funds placed into your HRA by your employer do not count toward your taxable income, allowing you to save on both medical expenses and taxes.

• Coverage for Non-Covered Medical Expenses. HRAs can help pay for various medical costs that may not be covered by insurance, including prescriptions, medical supplies, mental health services, transportation, and certain food and beverage expenses related to treatment.

While HRAs offer several benefits, there are also some limitations to be aware of:

• Reimbursement Process. Employees typically must pay upfront for medical expenses before seeking reimbursement from the HRA.

• Employer Control. Employees do not have direct access to HRA funds and must adhere to employer guidelines.

HRA Examples

HRAs can be structured in various ways. Here are some common types:

1. Employee Pays First

   For example, if your health plan has a $5,000 deductible and follows the “employee pays first” model, you would pay $2,500, with the employer covering the remaining $2,500 from your HRA. Variations may exist, requiring different initial payments before the HRA contributes.

2. Employer Pays First

   In this setup, if your deductible is $8,000, the employer might pay the first $4,000, meaning you won’t incur costs until you surpass that amount. This design is often used to ease the transition to high-deductible plans.

3. Split Deductible

   With this arrangement, your employer shares the cost of your deductible. For instance, if you have a $6,000 deductible and a doctor visit costs $150, your HRA would cover $75, and you would pay the remaining $75. The proportions can vary significantly depending on your employer’s plan.

4. Divided Deductible

   This structure can be more complex but beneficial for those who do not typically meet their entire deductible. For instance, with a $7,000 deductible, you might pay the first $1,750, the HRA would cover the next $3,500, and you would again be responsible for the last $1,750.

The Differences Between an HRA, an HSA, and an FSA

In addition to HRAs, you may encounter HSAs and FSAs in your benefits documentation.

Health Savings Accounts (HSAs) are employee-funded accounts that allow you to set aside money for medical expenses. Contributions are deducted from your paycheck before income taxes, but your employer typically does not contribute to HSAs.

Conversely, both employees and employers can contribute to Flexible Spending Accounts (FSAs), which often cover a broader range of expenses, including some over-the-counter medical items.

Unlike HRAs, employees cannot contribute to HRAs, and these accounts have specific lists of approved expenses.

Learning Resources for HRAs

To help navigate the world of HRAs, consider the following resources:

1. Your Insurance Provider. Begin by visiting your insurance provider’s website for articles, FAQs, and insights related to HRAs and their offerings. Many providers also offer mobile apps for quick expense verification.

2. Your Company’s Human Resources Department. For specific inquiries regarding your HRA, your HR department is the best resource. They can clarify the requirements of both the insurance provider and your company.

3. The IRS’s List of Eligible Expenses. Check the IRS Publication 502 for an alphabetized list of medical expenses covered by HRAs, which includes indirect expenses like service dogs or home modifications due to disabilities.

Who Can Offer an HRA?

If you’re an employer contemplating offering an HRA, the only requirement is to have at least one employee on your payroll—though that employee cannot be yourself. Self-employed individuals are ineligible for an HRA plan.

To implement an HRA, you’ll need to complete the necessary paperwork to comply with IRS, ERISA, HIPAA, and Affordable Care Act standards.

Many companies opt to have a third party manage these arrangements for efficiency and compliance, similar to other insurance offerings.

Author

Abby McCain

Abby is a writer who is passionate about the power of story. Whether it’s communicating complicated topics in a clear way or helping readers connect with another person or place from the comfort of their couch. Abby attended Oral Roberts University in Tulsa, Oklahoma, where she earned a degree in writing with concentrations in journalism and business.