Employers can provide employees with several different options for health benefits. One of those options is a Health Reimbursement Arrangement or an HRA for short. In this article, we break down the major elements of an HRA and how they can help pay for your health care expenses.
What is a Health Reimbursement Arrangement (HRA)?
A health reimbursement arrangement is a special employer-funded account dedicated for employees. Employees can use this account to help pay for out-of-pocket medical expenses.
Your employer must offer the HRA, as it is not a health account available to individuals. Employers can define what expenses their HRA provisions cover. HRA qualified expenses are akin to FSA qualified expenses and still need to stay within IRS guidelines. Some of these common expenses include dental and vision expenses, and prescription drug costs. For more eligible expenses, check out Lively’s “What’s Eligible?” page or IRS publication 502.
It's important to note that an HRA is NOT health insurance. Think of it more like an account in which your employer gives you a monthly allowance of tax-free money. Employees can then use those tax-free funds on qualified healthcare expenses.
NOTE: The Affordable Care Act requires employees to enroll in their employer's healthcare plan to be eligible for an HRA.
How Do I Qualify for an HRA?
According to the IRS, employers can offer an HRA to different classes of employees. Some of these segments of employees include:
- Full-time, part-time, or seasonal status
- Employees covered by a collective bargaining agreement
- Salaried or non-salaried (like hourly workers) employees
- Employees who haven't satisfied a waiting period
- Non-resident aliens with no U.S.-based income
- Employee work locations
- Any combination of 2 or more employee types listed above
Employees can use their HRA for eligible dependents. This includes:
- A spouse
- Children under the age of 26
- Children over the age of 26 who are tax dependents
- Domestic partners who qualify as tax dependents
How Does a Health Reimbursement Arrangement (HRA) Work?
HRA limits are set by the IRS every year. In 2021, the employer contribution limit for small business HRAs is $5,300 for individuals and $10,700 for families.
The key to understanding how HRAs work is in the R - reimbursement. Because an HRA is considered a "notional arrangement," you will not receive funds from your HRA until you show a receipt for a qualified expense. This means that employers will reimburse funds from an HRA after an employee makes a qualified medical expense.
Most HRAs follow the same usage structure:
- Employers set an allowance. Employers will set the amount of tax-free funds aside every month. This is the greatest amount an employee can spend in a given month on qualified expenses.
- Employees make a qualified expense. Employees go out and make qualified expenses. This includes health insurance premiums.
- Employees submit a receipt. An employee submits proof of expense to their employer. This is often done through receipts, invoices, or an explanation of benefits.
- Employers review proof of expense. Employers look for three things on a proof of expense: the type of service or product, the date of the expense, and the amount. If the proof covers these items and is HRA eligible according to the IRS, the employer approves expense for reimbursement.
- Employers provide reimbursement to the employee. Employers provide reimbursement either via direct deposit or check to their employees, given that their expense stays within their monthly allowance and plan period.
Remember: all HRA administrators are different. Be sure to double-check with your employer for the correct reimbursement procedures.
The Benefits of an HRA
One of the reasons why an HRA is a popular choice is because they give employees the flexibility of choice.
- Tax-Advantaged: The money that your employer contributes to an HRA is not considered part of your income. This means that you will not be taxed for your HRA allowance.
- Lower Cost: Since your employer is the one funding your HRA, there is a possibility that you may end up paying less for your health care in the long-run.
- Tax-Free Reimbursements: After paying for your healthcare expenses out-of-pocket, the reimbursements that you receive from your employer are not taxed.
- Funds available on Day 1: With other tax-advantaged accounts, like an HSA, you have to wait until your funds accumulate to use them. With an HRA, you can use these funds on Day 1 when your plan starts.
- Rollover Possibility: If an employee doesn't use up all the resources within their HRA, their employer can choose to roll over those funds into the next month or year, depending on the type of HRA implemented.
Is an HRA Right for Me?
Everyone's healthcare situation is unique, and if you have the opportunity to take advantage of an HRA, consider it. An HRA is a good way for employees to save money on health expenses that they would have to spend their own money on.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.