Ultimate Guide to Health Reimbursement Arrangements (HRAs): Types and Benefits

According to the Society for Human Resource Management, the average age of employees covered by an HRA is younger than the typical Healthcare.gov enrollee, indicating that HRAs are attracting a younger and healthier demographic to the ACA marketplace. This trend reflects a growing preference for flexible, cost-effective healthcare options.

Many employers, however, face challenges in providing affordable and tax-advantaged healthcare benefits without stretching their budgets. Traditional group health insurance plans can be expensive and inflexible, leaving both employers and employees dissatisfied with their options. Health Reimbursement Arrangements (HRAs) present a customizable solution, allowing employers to offer valuable healthcare benefits while maintaining cost control and maximizing tax advantages for both parties.

In this blog, we'll explore how HRAs work, their benefits for both employers and employees, and how they can be a game-changer in managing healthcare expenses.

Key Takeaways:
HRAs provide tax-free reimbursements
Different types of HRAs to suit various needs
Advantages and limitations for employers and employees
What’s covered and what’s not

What is a Health Reimbursement Arrangement (HRA)?

A Health Reimbursement Arrangement (HRA) is an employer-funded health benefit plan that allows employees to be reimbursed for qualified medical expenses. Unlike traditional health insurance, an HRA is designed to help employees cover healthcare costs while giving employers flexibility and cost control. HRAs are typically offered in addition to, or in place of, group health insurance and provide tax-free reimbursement for out-of-pocket medical expenses.

How does a Health Reimbursement Arrangement (HRA) work?

HRAs work by allowing your employer to contribute a fixed amount of money to your account. You can then use these funds to pay for qualified medical expenses such as doctor’s visits, prescription medications, and other health-related costs. Employers set a specific annual limit for contributions, and any unused funds may roll over to the following year (depending on the plan). The beauty of an HRA is that the funds are tax-free, both for the employee and the employer, making it a highly cost-effective benefit. For more details, visit the IRS page on HRAs.

What are the different types of HRAs?

There are several types of HRAs designed to meet different employee needs and employer structures. These include:

Individual Coverage HRA (ICHRA): This type of HRA allows employees to purchase their own health insurance (such as through the Health Insurance Marketplace) and then get reimbursed for premiums and other medical expenses.
Qualified Small Employer Health Reimbursement Arrangement (QSEHRA): Aimed at small businesses with fewer than 50 employees, this HRA allows employers to provide tax-free reimbursements for employees' health insurance premiums and qualifying medical expenses.
Excepted Benefit HRA (EBHRA): This allows employers to offer reimbursements for limited medical expenses, such as dental and vision care, without needing to offer a full health insurance plan.
Group Coverage HRA (GCHRA): The Group Coverage HRA works alongside a traditional employer-sponsored group health plan. Employers can reimburse employees for their out-of-pocket medical expenses, such as co-pays, deductibles, and prescriptions, on top of their existing group health insurance.
Retiree HRA: A Retiree HRA is designed specifically for retirees who are no longer eligible for employer-sponsored health insurance. Employers can use this type of HRA to provide tax-free reimbursements for healthcare costs incurred after retirement, such as premiums, prescription medications, and medical treatments.
Dental/Vision HRA: This type of HRA allows employers to offer reimbursements for dental and vision care expenses, such as check-ups, glasses, and other related treatments. It is often paired with a traditional health insurance plan but is more focused on specific health needs.

Each HRA type is governed by specific rules and restrictions, so it’s important to understand which one is best suited for your needs. Click here to learn more about each type.

Key considerations for Health Reimbursement Arrangements

HRAs Are Not Traditional Health Coverage: Unlike a typical employer-sponsored health plan, an HRA is an employer-funded account that reimburses employees for qualifying medical expenses up to a set dollar amount each year. Unused funds may carry over from year to year.

You Must Have Health Coverage to Use the HRA: To access HRA funds, you must have qualifying health coverage. This can include plans purchased through the Marketplace or other qualified sources.

HRAs May Help Pay Premiums: For certain types of HRAs, you can use the funds to pay monthly premiums for a health plan you purchase on your own.

Are HRA reimbursements tax deductible?

Yes, HRA reimbursements are tax-deductible for both employers and employees. For employees, reimbursements are considered tax-free income, which means they won’t have to pay federal income tax or payroll taxes on the funds used for qualified medical expenses. For employers, contributions to the HRA are deductible as a business expense, offering significant tax advantages for both parties.

Searching for more savings this tax season? Check out this article on How to Claim the Earned Income Tax Credit for Extra Savings.

Pros and cons of Health Reimbursement Arrangements (HRAs)

Pros:

Cost Control for Employers: Employers can set annual contribution limits for HRAs, helping to keep healthcare costs predictable and manageable.
Tax-Free Reimbursements: Employees can receive tax-free reimbursements for qualifying medical expenses, which can reduce their overall tax liability.
Flexibility for Employees: HRAs offer employees flexibility, as they can use the funds to cover a variety of out-of-pocket healthcare expenses, and in some cases, premiums for individual health plans (such as under ICHRAs or QSEHRAs).
Carryover of Funds: Unused HRA funds may roll over into the next year, allowing employees to accumulate savings for future medical expenses.

Cons:

Employer-Dependent: HRAs are only available if the employer offers them. This means not all employees will have access to this benefit.
Requires Qualifying Health Coverage: Employees must have qualifying health insurance (either through an employer, the Marketplace, or another qualifying plan) in order to use HRA funds for reimbursement.
Complex for Employers: Different types of HRAs (e.g., ICHRA, QSEHRA, EBHRA) come with specific rules and regulations, which can make HRA management and compliance complex for employers.
Limited Awareness for Employees: Some employees may not fully understand how HRAs work, what expenses are eligible for reimbursement, or how to properly use their HRA funds, leading to underutilization of the benefit.

HRAs can provide valuable benefits for both employers and employees, but they also come with certain complexities. Understanding the pros and cons is crucial for both parties to ensure the HRA is used effectively and in compliance with regulations.

What expenses are covered by a Health Reimbursement Arrangement?

Covered Expenses:

HRAs typically cover a wide range of qualified medical expenses, including:

Doctor’s Office Visits and Co-pays
Prescription Medications
Medical Supplies (e.g., bandages, syringes, glucose test strips)
Hospital and Surgery Expenses
Dental and Vision Care (in some cases, depending on the HRA type and specific plan rules)

Note: Not all HRAs, such as Excepted Benefit HRAs (EBHRAs), may cover dental and vision care. Be sure to check your specific HRA’s guidelines.

What expenses are not covered by a Health Reimbursement Arrangement?

Not Covered Expenses:

While HRAs offer flexibility, there are still certain medical costs they do not cover. Common exclusions include:

Health Insurance Premiums (except for Individual Coverage HRAs (ICHRA) and Qualified Small Employer HRAs (QSEHRA))
Over-the-Counter Medications (unless prescribed by a doctor)
Cosmetic Treatments (e.g., plastic surgery, cosmetic dentistry, or elective procedures not medically necessary)
General Wellness Expenses (e.g., gym memberships, vitamins, or weight loss programs not prescribed by a doctor)

Note: Different types of HRAs may have specific rules on what’s covered. Always review your plan's details to ensure you're reimbursing eligible expenses.

Can you use marketplace coverage with an HRA?

Yes, you can use Marketplace coverage with certain types of HRAs, specifically Individual Coverage HRAs (ICHRA). If your employer offers an ICHRA, you can use the funds to reimburse yourself for the premiums you pay for a Marketplace health plan. This is especially beneficial for employees who do not have access to traditional group insurance or want the flexibility to choose their own health plan through the Marketplace.

However, to qualify for ICHRA reimbursement, you must be enrolled in a Marketplace plan or other qualifying health coverage. Make sure to verify your eligibility and plan details to avoid complications when filing for reimbursements.

Why should employers consider offering HRAs?

HRAs can be a game-changer for employers looking to offer healthcare benefits without the high costs and administrative complexity of traditional group health plans. By providing employees with a fixed allowance to cover their medical expenses, employers can better control their healthcare budgets while still offering valuable benefits to their workforce. HRAs are also a great option for small businesses, as they can be tailored to fit the company’s financial situation and employee needs.

Is a Health Reimbursement Arrangement the right choice for you?

Health Reimbursement Arrangements (HRAs) offer a flexible, tax-efficient way to help cover medical costs. Whether you're an employee seeking reimbursement for healthcare expenses or an employer considering offering this benefit, understanding the ins and outs of HRAs is crucial. By exploring the different types of HRAs and knowing the rules for reimbursement, you can maximize the value of this benefit, reduce healthcare costs, and make informed decisions about your health coverage options.

For more information and to determine if an HRA is right for you, consult with a benefits advisor or review the plan options provided by your employer.