Health reimbursement arrangements (HRAs) are a benefit that some employers offer their employees to help with healthcare expenses. They’re a way for companies to reimburse workers for these costs, and reimbursements are generally tax free when used for qualified medical expenses.
These accounts work alongside group health insurance plans that comply with the Affordable Care Act (ACA). The plan is often a high-deductible health plan (HDHP), but it doesn’t have to be; the plan can be a PPO or an HMO.
What an HRA Isn’t
The alphabet soup of health insurance benefits can confuse anyone. HRAs are not health savings accounts (HSAs) or flexible spending accounts (FSAs), each of which has its own set of rules and benefits for how it can be used to pay for qualified medical expenses. Here's a quick rundown, since these terms can get confusing.
HSAs must be used with an HDHP, contributions can come from both employers and employees, the balance can be invested and rolled over from year to year and the account goes with you when you change jobs.
FSAs don’t have to be used with an HDHP, contributions come only from employee payroll deductions and the balance can’t be invested and doesn’t earn interest. FSA balances must be used in the current plan year, though some employers allow small amounts to roll over or give employees a grace period at the beginning of the following year to use up the balance. Also, FSAs don’t go with you when you change jobs. (For related reading, see How Flexible Spending Accounts Work and How to Use Your HSA for Retirement.)
Who Funds One?
HRAs, on the other hand, are funded entirely with employer money. An HRA is not an account; it’s a reimbursement arrangement between you and your employer. You can’t invest the balance and it doesn’t earn interest. If you participate in an HRA, you won’t see any deductions from your paycheck.
Instead, your employer decides how much it is willing to reimburse you for healthcare costs on a monthly or annual basis. If you still have a balance at the end of the year, it may roll over as long as your employer continues to offer the HRA and you continue to participate, but it may not: That decision’s up to your employer, too.
How to Participate
To participate in an HRA, you must opt in during your employer’s open enrollment period. If you have a qualifying life event, you can sign up outside of open enrollment. Spouses and children who participate in your employer’s health insurance plan can also be reimbursed through an HRA. Unfortunately, if you’re self-employed, you can’t use an HRA. (See 10 Tax Benefits for the Self-Employed.)
It’s up to your employer to decide which expenses you will be reimbursed for. The expense must be a qualified medical expense listed in IRS Publication 502, but your employer can use a narrower list. In general, you can use an HRA to get reimbursed for qualified medical expenses your health insurance doesn’t pay for, such as medical and pharmacy expenses you must pay out of pocket before meeting your deductible and coinsurance you’re responsible for after meeting your deductible.
Eligible expenses include things like visiting the doctor when you’re sick, getting X-rays or having surgery. Some plans even let you use HRA funds for health insurance premiums. Dental and vision expenses usually qualify, too, as do a few over-the-counter items, such as diabetes testing aids, blood pressure monitors and contact lens solution. You can also use your HRA to pay for long-term care insurance premiums.
Some HRAs are more limited and you can only use them for coinsurance. Other HRAs only reimburse expenses after you’ve met your deductible. Employers have a lot of flexibility in how they set up HRAs. (For related reading, see Vision Care Insurance: Will You See a Benefit? and Should You Bite on Dental Insurance?)
Employers can’t let you use HRA funds for things the IRS doesn’t allow, though. You can’t use an HRA for over-the-counter medicines unless your doctor has written a prescription for them. You also can’t use an HRA to be reimbursed for costs you incurred before your HRA participation became effective or for costs from a different year.
Often, your HRA administrator will be able to verify your claim automatically, but sometimes you’ll need to submit an itemized bill from your healthcare provider to substantiate your claim. By law, no expense is too small to be reimbursed, but your employer might require you to accumulate a minimum amount of reimbursable expenses before it will issue a check.
Your employer chooses how it will reimburse you for qualified medical expenses. You may receive a debit card so you can pay for your expenses as needed, or you may have to pay up front, then request reimbursement. Some plans will reimburse your doctor directly, so you don’t need to use a debit card or wait to get your money back.
The maximum you can be reimbursed per year is whatever your employer decides. In 2015, the average employer contribution to an HRA was $1,079 for singles and $2,001 for families, according to the Kaiser Family Foundation’s 2015 Employer Health Benefits Survey. If your employer allows it, you may be able to spend the amount remaining in your HRA within a limited period after you are terminated.
You don’t have to report your participation in an HRA on your tax return. The amount your employer is willing to reimburse you for medical expenses through an HRA is not considered taxable income, nor are the actual amounts reimbursed, as long as you put the money toward qualified medical expenses as defined by the IRS and your employer.
Exceptions to tax-free distributions apply in a few situations: If your employer pays out your unused reimbursements at the end of the year or when you leave your job, the money will be considered taxable income. Since it’s not being used to reimburse you for qualified medical expenses, it’s treated like ordinary income. (For further reading, see 10 Sources of Nontaxable Income.)
Using an HRA with an HSA or FSA
In most cases, you cannot use an HRA along with a health savings account (HSA). An exception is if you have a limited-purpose HRA, which you will probably only be able to use for dental and vision expenses.
It is possible to have both an HRA and an FSA. If you do, great – that’s even more untaxed income you can use for medical expenses. You can contribute up to $2,550 to an FSA in 2016, and your employer will take that money out of your paycheck. The question is, if you have both an HRA and an FSA, which account should you use to pay for a given medical expense? If an expense is only covered by one account or the other, you have your answer. If it’s eligible to be paid from either account, you’ll need to see what your employer’s rules are about which account pays first. It probably goes without saying, but you can’t double dip and be reimbursed for the same expense from both accounts.
Should You Participate?
HRAs are often offered alongside high deductible health plans. If you prefer a plan with a lower deductible and your employer offers that option – or if there’s another plan that better suits your needs – you may not want to participate in the HRA. If your employer’s HRA comes with an HMO and you’d prefer a PPO, that’s another reason to shop around. Also, if you think your medical expenses will be too low for you to get a meaningful benefit from the plan (or too high for the plan to help you enough), see if your other options offer a better combination of price and coverage. Another consideration is that your employer’s contribution to your HRA might be less than your health insurance deductible, so you’ll need to make sure you can afford to pay the difference out of pocket.
If your employer lets your HRA balance carry over from one year to the next, this feature can make the plan more appealing since it lets you save for a rainy day. Say, for example, that your employer is willing to reimburse $1,000 for the year, and you only request reimbursement for $800; the $200 balance will carry over to the next year.
If you’d prefer a plan that you can take with you if you change jobs, an HSA could be a better choice; HRAs are not typically portable – again, it’s up to your employer. If you’re choosing a health plan mid-year because you’re a new employee, find out whether you’ll get the full HRA amount that the company typically gives its employees for the year or a prorated amount based on the remaining time in the year. (Learn more in How to Shop for Health Insurance.)
The Bottom Line
HRAs can vary significantly from one employer to the next, so while this article has given you a broad overview of what to expect, you’ll want to read the summary plan description of your employer’s HRA before you sign up. That’s where you’ll find the details on how your employer has structured its HRA so you can figure out if it’s a good option for you.
There are many positives about HRAs, since they’re funded entirely by your employer and you can use the money like pretax income to pay for qualified medical expenses. But if you have better or more affordable options available for insurance plans, FSAs or HSAs, you might want to skip the HRA and choose those instead.