What Is a Health Reimbursement Account (HRA)?

A Health Reimbursement Account (HRA) is an account-based health plan to pay for qualified medical expenses. HRAs are employer-funded, and employees can use them to reimburse themselves for eligible medical expenses, giving them the flexibility to choose their provider. Other benefits include the ability to pay for services not covered by traditional insurance, like dental care, and the fact that reimbursements are not considered taxable income.

Alternatively, traditional insurance pays the provider directly and imposes limitations like provider network, all while the policyholder is still responsible for copays, coinsurance, and deductibles for medical services. 

How Do HRAs Work?

A Health Reimbursement Account is like a piggy bank your employer gives you annually that is pre-funded with a certain amount of money. Every time you have an eligible medical expense, you can reach into that piggy bank to reimburse yourself. 

Remember that only your employer can fund the account, but your reimbursements are not typically taxable income. 

Employers can also determine which medical expenses are “qualified or eligible.” So, while you can choose your provider, you must ensure their service falls under the list of qualified medical expenses. 

What Can You Use an HRA For?

Employers are the only ones who can determine which expenses are reimbursable. Usually, the list of eligible expenses includes services not covered under traditional insurance. Sometimes, you can roll over unused HRA funds into the following year. 

Here is a sample list of what an HRA may cover:

• Doctor or Specialist visit copays.
• Dental care, such as x-rays, cleanings, and extractions.
• Vision care, such as eyeglasses, eye exams, and contacts
• Over-the-counter drugs
• Acupuncture
• Birthing classes
• Rental cars for medical care
• Fitness programs
• Infertility treatments
• Lodging for medical care
• Orthopedic shoes
• Walking aids
• Wigs 

Types of HRAs

So far, we have investigated the standard HRA. However, there are other variations of the traditional HRA, such as the ICHRA, QSEHRA, and EBHRA.

Individual Coverage HRA (ICHRA)

An Individual Coverage Health Reimbursement Account (ICHRA) is a type of HRA offered by small or large employers. Like a traditional HRA, the employer determines the funding amount and which expenses qualify.

Employees can use an ICHRA to pay individual health insurance premiums instead of employer group health plan premiums. This gives employees more choices for their primary medical policy as they are not forced to purchase it from their employer. It is important to note that employers cannot offer both group health plans and ICHRAs.

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is a type of HRA small businesses (i.e., businesses with less than 50 employees) can offer if they do not offer a traditional health plan. Employees must have credible health insurance to be eligible for a QSEHRA. 

While employers set funding for the account, there are limits on how much they can contribute annually. The employer will also choose reimbursable expenses, including insurance premiums and deductibles. Before enrolling in a QSEHRA, you should know that it may affect subsidy tax credits for those with Marketplace plans.

Excepted Benefit HRAs (EBHRA)

Excepted Benefit Health Reimbursement Accounts (EBHRA) can be offered by businesses of any size, just like an ICHRA, but the company must offer its employees a group health plan. However, employees are not required to enroll in the employer group health plan. The employer also sets funding, but there are annual funding limits.

Excepted Benefit HRAs can be used to cover excepted benefits not traditionally covered by other HRA types like COBRA insurance, long-term care, and premiums for dental or vision. However, they cannot be used to pay for individual or group health insurance premiums (except COBRA coverage). 

Should You Get an HRA?

There are many benefits and drawbacks to consider when thinking about getting an HRA.

Benefits

• Provider flexibility: You can see any provider you wish without network restrictions like traditional insurance.
• Tax advantages: Reimbursements are usually not counted as taxable income.
• Covers beyond insurance: Compliments your regular health insurance by covering items not typically paid for by traditional insurance, such as fitness memberships, infertility treatments, and dental and vision care.
• Rollover unused funds: Depending on the rules placed on your HRA, you can roll over used funds to the following year, allowing you to use the money when needed.
• Family coverage: Coverage for you and your loved ones through individual or family HRAs.

Drawbacks

• Eligible expenses chosen by employer: Employees cannot control the eligible expenses. Qualified expenses may only meet the needs of some.
• HRAs are not portable: If you leave your employer, you cannot take your HRA with you.
• Benefits are not standardized: Each employer can choose which expenses are qualified, rollover benefits, and funding amounts, which can make it confusing for someone who is comparing options.
• HRAs are funded by employer: You cannot add your money to the account, and your employer has the final say on the amount of funding you receive.

HRA Alternatives

If an HRA isn’t for you, other options exist, such as a Flexible Savings Account (FSA) or a Health Savings Account (HSA).

FSA

A Flexible Savings Account is an account-based plan that both you and your employer fund with pre-tax dollars, whereas an HRA is only employer-funded. At the start, you choose your contribution for the year, and a portion is taken from each paycheck. Keep in mind your contribution amount must be kept the same.

Both HRA and FSA funds can only be used for eligible medical expenses. However, the FSA has added tax incentives since it lowers your taxable income on each check. FSAs do not have a rollover benefit, so any unused funds are lost at the end of the year.

HSA

Unlike an HRA, you don’t have to be employed to have a Health Savings Account. Your contributions go in pre-tax, just like an FSA, but you do not lose unused funds at the end of the year. Some HSAs have an investment feature that allows you to invest your funds and potentially grow your money while it sits.

You must have a high-deductible health plan to keep the HSA, though, and this type of insurance may not be suitable for those needing a high healthcare level. Furthermore, being claimed as a dependent will disqualify you from an HSA.

HRA Tax Implications

The tax advantages of an HRA can be highly favorable for both the employer and the employee. Reimbursements paid to the employee from the employer-funded account can be filed as a tax deduction by the employer. On the flip side, reimbursements received by the employee are typically tax-free.

Offering traditional health insurance can be costly, whereas a Health Reimbursement Account provides consistent, easy-to-predict spending figures for the year. Employees can use funds for services not covered by traditional insurance, which saves them money. It could be the perfect fit if it aligns with your needs.

All in All

A Health Reimbursement Account is a helpful tool that benefits both the employee and the employer. Employer-funded accounts can be used for various services not typically covered by your regular insurance plan. And since the reimbursement is tax-free, there is little risk on the employee’s end. Employers also get to enjoy tax deductions. The biggest consideration would be job stability- unfortunately, the HRA will not follow you if you leave your employer.

Frequently Asked Questions