A Health Reimbursement Arrangement (HRA) is a tax-advantaged benefit that allows both employees and employers to save on the cost of healthcare.
HRA plans are employer-funded medical reimbursement plans. The employer sets aside a specific amount of pre-tax dollars for employees to pay for health care expenses on an annual basis. Based on the plan design, HRAs can generate significant savings in overall health benefits.
The primary requirements for an HRA are that:
- the plan must be funded solely by the employer and cannot be funded by salary reduction, and
- the plan may provide benefits for substantiated medical expenses only
HRAs are most commonly offered in conjunction with a High Deductible Health Plan. As a rule, moving to a High Deductible Health Plan will result in reduced premium costs, which creates real savings on healthcare costs for the employer. HRA contributions may then be funded using the savings gained from the lower premium costs. By funding an HRA, the employer effectively bridges the gap between the higher deductible and the expenditure amount at which the insurance coverage “kicks in” for their employees.
Most importantly, all employer contributions to the plan are 100% tax deductible to the employer, and tax-free to the employee.
HRAs are very flexible, allowing the employer to design their plan to meet the unique needs of the company and the employees. Common plan designs include the following:
|Deductible, Co-pay, and Co-insurance||All medical expenses that are applicable to the health plan’s deductible, a co-pay amount, or a co-insurance amount qualify for reimbursement. Qualified expenses are those incurred by the employee or the employee’s family. An Explanation of Benefits (EOB) statement (provided by the employee’s health insurance provider) showing evidence that the expense is applicable to the insurance deductible, is typically required for substantiation of requests for reimbursement.|
|Deductible||All medical expenses that are applicable to the health plan’s deductible qualify for reimbursement. This plan design does not include co-pays or co-insurance amounts. Qualified expenses are those incurred by the employee or the employee’s family. An EOB statement is also typically required for substantiation of requests for reimbursement.|
|All Uninsured Medical Expenses||All out-of-pocket medical expenses (uninsured costs) are eligible. This includes deductibles, co-pays, coinsurance, dental, vision, prescription, and other out-of-pocket medical expenses. These expenses may be incurred by the employee or the employee’s family. An EOB statement, copy of a receipt, or copy of a bill identifying the date of service, amount of service, and the name of the service provider are typically used to substantiate requests for reimbursement.|
|Specific Expenses Only||Plans may be designed to cover dental expenses only, orthodontia expenses only, vision expenses only, prescription medical expenses only, and/or other specified expenses. A copy of a receipt or copy of a bill identifying the date of service, amount of service, and the name of the service provider are typically used to substantiate requests for reimbursement.|
With an HRA, unused fund amounts may be carried over from year to year. This differs from a Flexible Spending Account which maintains the “use-it-or-lose-it” rule.
All requests for reimbursement under an HRA must be substantiated. The most common means of substantiation is the EOB statement provided by the employee’s health insurance provider after a medical expense has been incurred.