What Is a Health Reimbursement Arrangement (HRA)?
A health reimbursement arrangement (HRA) is an employer-funded plan that reimburses employees for qualified medical expenses and, in some cases, insurance premiums. Employers are allowed to claim a tax deduction for the reimbursements they make through these plans, and reimbursement dollars received by employees are generally tax free.
How a Health Reimbursement Arrangement (HRA) Works
A health reimbursement arrangement is a plan set up by an employer to cover medical expenses for its employees. The employer decides how much it will put into the plan, and the employee can request reimbursement for actual medical expenses incurred up to that amount. All employees in the same class must receive the same HRA contribution.
An HRA is not an account. Employees cannot withdraw funds in advance and then use them to pay medical expenses. Instead, they must incur the expense first, then have it reimbursed. Reimbursement at the time of service is possible if the employer provides an HRA debit card. An employee who uses up all the allocated funds in the HRA before year-end will have to cover any subsequent health bill out-of-pocket—or with the funds in a flexible spending account (FSA), also known as a flexible spending arrangement), when available, or a health savings account (HSA) for employees who have a high-deductible health plan (HDHP).
- Employers, not employees, fund HRAs.
- An HRA is not portable; the employee loses this benefit when they leave the company.
- Government rules, which employers may refine further, determine which expenses can be reimbursed for employees.
- Depending on the type of HRA, funds may be used to reimburse health insurance premiums, vision and dental insurance premiums, and qualified medical expenses.
- The rules about HRAs are substantially different starting in January 2020.
Benefits of Health Reimbursement Arrangements
In 2019, HRAs can be used to pay for qualified medical expenses, which include prescription medications, insulin, an annual physical exam, crutches, birth control pills, meals paid for while receiving treatment at a medical facility, care from a psychologist or psychiatrist, substance abuse treatment, transportation costs incurred to get medical care, and much more. Under Obama administration rules, they can't be used to pay for individual health insurance premiums.
Starting in January 2020, HRAs will change considerably. The government will allow employers to offer their employees a new type of HRA called an individual coverage HRA in lieu of group health insurance. Employees can use these HRAs to buy their own comprehensive individual health insurance with pretax dollars either on or off the Affordable Care Act's health insurance marketplace. Individual coverage HRAs can also reimburse employees for qualified health expenses such as copayments and deductibles.
In addition, under the new rules, employers that continue to offer traditional group health insurance can offer excepted benefit HRAs to reimburse employees for up to $1,800 a year in qualified medical expenses. Employees can enroll in an "excepted benefit HRA" even if they decline group health insurance coverage, but they cannot use the funds to buy comprehensive health insurance. They can, however, use the funds to pay for short-term health insurance, dental and vision insurance premiums, and qualified medical expenses (click here and scroll to Q 11 for details).
Employees can use the money in their HRAs to cover the allowed medical, dental, and vision costs of their spouses and dependents.
Limitations of Health Reimbursement Arrangements
An HRA only covers qualified medical and dental expenses. According to the Internal Revenue Service (IRS), medical expenses are costs incurred to alleviate or prevent a physical or mental ailment, not expenses to maintain general health, such as vitamins.
Expenses that do not qualify as a necessary medical expense include, for example, teeth whitening, maternity clothes, funeral services, health club membership fees, controlled substances, childcare for a healthy baby, marriage counseling, medication from other countries, and non-prescription medications.
An employer may exclude certain medical expenses even though the expenses are qualified by the IRS. An employer’s list of reimbursable medical expenses will be outlined in its HRA plan document for employees.
HRA Funding and Portability
The health reimbursement arrangement is funded solely by the employer, which also decides the maximum annual contribution for each employee’s HRA. With the new HRA rules in January 2020, employers still determine how much to contribute to employees’ HRAs, except that all workers in the same class of employees must receive the same contribution, as noted above. Workers who are older or who have dependents may receive more.
Any HRA money that is unspent by year-end may be rolled over to the following year, although an employer may set a maximum rollover limit that can be carried over from one year to the next. Furthermore, if an employee is terminated or leaves the company to work for another firm, the HRA does not go with them. (That makes it different from an HSA,—health savings account—which is portable. See below for more.)
HRA Tax Advantages
As a benefit to employers, reimbursements through the HRA are 100% tax deductible. As an alternative to more expensive retiree healthcare, an employer may use an HRA to cover the health costs of retired employees. In addition, since the plans are fully funded by employers, they offer predictability, allowing employers to anticipate their approximate maximum expense for HRA health benefits for the year.
Employees may use the arrangement to pay for a wide range of medical expenses not covered by their health insurance policies. Depending on the type of HRA, they may also use it for medical, dental, or vision insurance premiums. Furthermore, reimbursements are tax free up to a maximum amount for a coverage period. Some businesses may offer employees the added advantage of other employer-provided health benefits, such as an FSA, in conjunction with an HRA.
Health Reimbursement Arrangements vs. Other Arrangements
An employee who has both an FSA and an HRA—and has an expense that is eligible to be reimbursed through both plans—cannot choose which will cover the expense. Instead, the costs will be reimbursed by the plan that the employer has set up to pay first. When this primary plan has been depleted, the second plan will be used to cover any subsequent eligible medical expenses that are reported for reimbursement.
Here's closer look at two other options for funding out-of-pocket medical expenses.
An FSA is funded using a portion of an employee's pre-tax salary, and, in contrast to an HRA, each employee determines how much money should go into these arrangements annually—up to $2,700 in 2019. Unused funds in HRAs may be carried over to the following year according to the discretion of the employer. Unused FSA funds generally cannot be used in the next plan year although an employer may offer either a short grace period or allow up to $500 to be carried over.
In comparison to an HRA, a health savings account (HSA) is a fully vested tax-advantaged account that is not subject to forfeiture if funds remain in the account at the end of the year. An HSA is paired with a high-deductible health plan (HDHP) to pay for medical and dental expenses. The account is funded by the employee and/or employer and, like an FSA, cannot be used to pay insurance premiums. Unlike HRAs and FSAs, employees get to keep their HSAs if they change employers.