How Do Health Reimbursement Arrangements (HRAs) work?
Key takeaways:
A health reimbursement arrangement (HRA) is a health plan that’s funded by your employer. It’s used to pay for qualified medical expenses not covered by your primary health insurance.
Your employer sets up the account and determines how much money they will contribute, within the limits set by the IRS. Employees cannot contribute to an HRA.
You typically don’t have to pay state or federal taxes on your reimbursement for eligible medical expenses.
Many employees offer a flexible spending account (FSA) or health savings account (HSA) as part of their benefits package. Some also offer access to a health reimbursement arrangement (HRA).
Similar to an FSA and HSA, an HRA is a tax-advantaged account you can use for eligible medical expenses. But the rules, structure, and contribution limits are different.
How do health reimbursement arrangements work?
An HRA, sometimes also called a health reimbursement account, is an employer-funded health plan. It can be used to pay for qualified healthcare expenses, like coinsurance payments and prescription medications. You can check with your employer to get a better idea of which expenses would be approved under your company’s HRA.
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You can use an HRA in addition to an FSA and HSA. But it doesn’t quite work the same way as those accounts. Here’s how an HRA is different from other types of health savings plans.
| Account comparison | HRA | HSA | FSA |
|---|---|---|---|
| Only your employer can contribute money to the account. | Yes | No | No |
| Pre-tax funds are deducted from your paycheck to fund the account. | No | Yes | Yes |
| You can contribute money to the account every year you qualify. | No | Yes | Yes |
| You are required to have a high-deductible health plan. | No | Yes | No |
| The funds in your account can be invested. | No | Yes | No |
Employers set up and fund HRAs. If your employer offers an HRA, they don’t have to offer you a traditional group healthcare plan. You can choose your own healthcare plan and use the funds in your HRA to pay for items not covered by insurance.
Employers determine how much they contribute for the year, within the limits set by the IRS. Unlike an FSA or HSA, employees don’t contribute money to an HRA. Employers reimburse employees for qualified healthcare costs that were paid out of pocket.
Let’s say you have an HRA and you need to pay for an inhaler, but your insurance plan doesn’t cover it. If your employer includes inhalers as a qualified expense, the HRA will reimburse you. You can typically file a claim for reimbursement anytime during the benefit year.
Do employees pay taxes on funds in an HRA?
No, employees don’t have to worry about paying taxes on HRA reimbursement funds used for qualified medical expenses. But, similar to an HSA or FSA, you have to make sure your HRA dollars are used to pay qualified medical expenses specifically to receive the tax-free benefits.
What can you use an HRA for?
You can use an HRA for IRS-defined, eligible medical expenses. Medical expenses are costs to diagnose, cure, treat, or prevent disease. Employers decide which specific medical expenses to cover when setting up a plan. This means that not all HRAs cover the same medical expenses.
Expenses that are typically reimbursed by an HRA include:
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If you purchase items or undergo procedures for general health purposes instead of medical reasons, you may not receive reimbursement. Examples of expenses typically not reimbursed are:
Makeup
Teeth Whitening
There is an exception for items that a healthcare provider deems necessary but are not technically covered under a plan. An individual will need a letter of medical necessity (LOMN) to demonstrate the need, in that case.
Let’s say a doctor recommends you take iron supplements to treat iron-deficiency anemia. Your healthcare provider will need to write an LOMN if you want to purchase the supplements with your HRA.
What are the advantages and disadvantages of HRAs?
It’s important to talk to your company’s human resources department or account administrator to find out how your HRA works. HRAs typically come with the following benefits:
Lower out-of-pocket healthcare costs.
Unused benefits that are carried over to the next year, if the employer permits
A fully employer-funded plan
Tax-free reimbursements
There are also some disadvantages to HRAs. Some of those disadvantages are:
An employer can require employees to meet a minimum deductible amount before receiving reimbursement for expenses. That means you’ll have to spend money on qualified medical expenses before you can use HRA funds.
You cannot use HRA funds after termination if the employer does not allow it.
An employee cannot contribute to an HRA. The employer has control over how much money is available to employees every year.
Your employer can’t directly give you unused money from an HRA.
Employers decide which medical expenses are qualified, so not all of your yearly medical expenses may be reimbursable.
Can you withdraw money from your HRA?
The money in your HRA has to be used for eligible expenses. Typically, your HRA administrator disburses funds once you make an eligible claim. But some employers issue their employees a debit card with access to their HRA funds.
When you submit a claim, you need proof of payment and, in some cases, of medical necessity.
Do the funds in health reimbursement arrangements roll over?
HRA funds can roll over. But it all depends on how your employer chooses to handle unused funds.
A roll over allows you to transfer unused funds from one plan year to the next. If your HRA funds roll over, you’ll have more money to use for qualified medical expenses.
Check with your employer about the specifics of your plan. Instead of rolling over funds in your HRA, your employer may choose to reset your HRA allowance at the end of the plan year. This means you will forgo any unused funds.
Before your funds expire, check with your employer to see if you can get reimbursed for common medical expenses, such as:
Skin care products
First-aid supplies
Over-the-counter medications
The bottom line
Health reimbursement arrangements (HRAs) can come in handy if you need to pay for medical expenses not covered by your health insurance plan. Similar to a flexible spending account (FSA) or health savings account (HSA), your reimbursements won’t count toward your taxable income. Meaning, you can use the money to pay for your qualified health expenses without worrying about taxes.
If your employer offers you an HRA, make sure you understand how your plan works. These health plans are set up and funded by your employer. But, unlike an HSA or FSA, you won’t be able to contribute your own money.
Your employer determines the amount of funds available through your account and how they can be used during the plan year. However, you will have the flexibility to choose your own health insurance plan to complement your HRA.
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References
Blue Cross Blue Shield of Michigan. (n.d.). How do Blue Care Network health reimbursement arrangements work?.
Healthcare.gov. (n.d.). Deciding between group coverage & an HRA?.
Healthcare.gov. (n.d.). Health reimbursement arrangement (HRA).
Healthcare.gov. (n.d.). Health reimbursement arrangements (HRAs) for small employers.
Internal Revenue Service. (n.d.). Health reimbursement arrangements (HRAs).
Internal Revenue Service. (n.d.). Health reimbursement arrangements: Notice 2002-45.
Internal Revenue Service. (2019). Health reimbursement arrangements and other account-based group health plans. Federal Register.
Internal Revenue Service.(2022). About publication 969 (2021), health savings accounts and other tax-favored health plans.
Internal Revenue Service.(2022). Health Reimbursement Arrangements (HRAs).
Internal Revenue Service. (2022). Publication 502 (2011), medical and dental expenses.
Internal Revenue Service. (2022). Topic No. 502 Medical and Dental Expenses.
