The Ultimate Guide to Health Reimbursement Arrangements: Everything You Need to Know

Health care expenses can be a significant financial burden for many individuals, especially those who are self-employed or work for small businesses without comprehensive health insurance options. Fortunately, Health Reimbursement Arrangements (HRA) can provide relief for these individuals’ medical expenses.

An HRA is a tax-advantaged benefit that allows employers to reimburse employees for qualified medical expenses. This reimbursement is not subject to income tax and is not considered taxable income to the employee. Here is what you need to know about HRAs:

Types of HRAs

There are different types of HRAs that can help meet the different medical needs of employees. The most common types are:

1. Comprehensive HRA: This covers any qualified medical expense, including deductibles, coinsurance, and copayments.

2. Stand-Alone HRA: This reimburses employees only for specific qualified expenses, such as dental or vision care.

3. Retiree HRA: This reimburses retirees for qualified medical expenses not covered by Medicare.

4. Limited Purpose HRA: This reimburses employees for qualified dental and vision expenses only.

Eligibility Requirements for HRAs

Any employer can offer an HRA to its employees, but the following conditions must be met:

1. Employees must be enrolled in a high-deductible health plan (HDHP).

2. The HRA must be funded entirely by the employer.

3. The employer determines the terms of the HRA, including eligibility requirements and reimbursement limits.

4. Unused funds from the HRA can carry over from year to year.

How HRAs Work

Once an employee is enrolled in an HDHP, they can submit receipts for qualified medical expenses to their employer for reimbursement. The employer sets the reimbursement limit for the HRA, and the employee can use the funds to pay for eligible expenses, including deductibles, copays, and coinsurance.

HRAs Vs. HSAs

HRAs and Health Savings Accounts (HSAs) are often used interchangeably, but they are not the same. While both offer tax-advantaged reimbursements for medical expenses, they differ in several ways:

1. Eligibility: HSAs are only available to individuals enrolled in an HDHP, while HRAs can be offered to any employee.

2. Funding: HSAs are funded by the individual, while HRAs are entirely funded by the employer.

3. Ownership: HSAs are owned by the individual and can be rolled over from year to year, while HRAs are owned by the employer and can be forfeited if the employee leaves the company.

The Bottom Line

HRAs are a valuable benefit for employees with high medical expenses, providing tax-advantaged reimbursements for qualified medical expenses. Employers must set up and manage the HRA according to Internal Revenue Service (IRS) guidelines to avoid tax penalties. If you have high healthcare expenses, talk to your employer about whether an HRA is an option.