Key Takeaways
- Employer-funded, tax-free medical expense reimbursements.
- Employees submit claims; employers reimburse up to allowance.
- Unused funds may roll over yearly, depending on plan.
- Provides cost predictability and tax benefits for employers.
What is Health Reimbursement Arrangement (HRA)?
A Health Reimbursement Arrangement (HRA) is an employer-funded, tax-advantaged benefit that reimburses employees for qualified medical expenses such as deductibles, copays, and sometimes premiums. It operates under IRS Section 105, allowing employers to set aside funds to cover health costs without employee contributions.
This arrangement helps employees manage out-of-pocket healthcare expenses while offering employers a flexible way to control benefit costs.
Key Characteristics
HRAs have distinct features that make them attractive to both employers and employees:
- Employer-funded: Employers fully finance the plan; employees cannot contribute.
- Tax advantages: Reimbursements are tax-free for employees and deductible for employers.
- Flexible design: Employers can customize coverage, often integrating with high-deductible health plans.
- Unused funds: Depending on the plan, unused balances may roll over annually.
- Reimbursement process: Employees submit claims with receipts to receive tax-free payment.
- Regulatory compliance: Plans must adhere to IRS guidelines and HIPAA privacy rules.
How It Works
Employers allocate a fixed allowance per employee that can be used to reimburse eligible expenses. You pay for qualified medical costs upfront and then submit documentation to your HRA administrator for reimbursement.
The administrator verifies expenses against IRS Publication 502 rules and issues tax-free reimbursements up to the allowance limit. This "notional" funding approach means employers only pay when claims are made, improving cost predictability.
Examples and Use Cases
HRAs are used by various companies and industries to enhance employee benefits:
- Airlines: Delta incorporates HRAs in their benefits to help employees manage out-of-pocket healthcare expenses alongside their group plans.
- Healthcare investing: Individuals interested in healthcare stocks often consider companies benefiting from the shift toward consumer-directed health plans; see our best healthcare stocks guide for insights.
- Low-cost investing: Employers may use HRAs paired with high-deductible health plans to reduce premiums, complementing employee investment strategies such as those covered in our best low-cost index funds resource.
Important Considerations
When evaluating an HRA, consider plan design details such as rollover policies, eligible expenses, and integration with other health benefits. Understanding your employer’s specific HRA structure ensures you maximize tax advantages and reimbursement opportunities.
Additionally, HRAs require proper documentation and compliance with IRS rules, so keep detailed records of all medical expenses to facilitate smooth claims processing.
Final Words
Health Reimbursement Arrangements offer a tax-efficient way to cover out-of-pocket medical expenses with employer-funded accounts. Review your current benefits to see if an HRA can reduce your healthcare costs and improve your financial flexibility.
Frequently Asked Questions
An HRA is an employer-funded, tax-advantaged benefit that reimburses employees for qualified medical expenses like deductibles, copays, and sometimes insurance premiums. It is approved by the IRS under Section 105 of the Internal Revenue Code.
Employers set a fixed allowance that they fully fund, and employees pay eligible medical expenses out-of-pocket first. Employees then submit claims with receipts to be reimbursed tax-free up to their allowance limit.
No, HRAs are entirely funded by employers, and employees cannot contribute their own money to these accounts.
HRAs typically cover qualified medical expenses such as deductibles, copays, coinsurance, dental and vision costs, COBRA premiums, and sometimes Medicare Part B premiums, all in accordance with IRS guidelines.
Whether unused HRA funds roll over depends on the specific plan design, but many HRAs allow remaining balances to carry over to future years for ongoing medical expenses.
Employers benefit from tax-deductible contributions, predictable budgeting since funds are reimbursed only when claims are made, and lower administrative costs compared to traditional group health plans.
HRAs are funded 100% by employers and allow employees more control to shop for individual coverage, often permit unused funds to roll over, and provide tax-free reimbursements, unlike traditional group plans that usually have shared premiums and less flexibility.
Yes, HRA administrators comply with HIPAA regulations to protect your personal health information and maintain required IRS records securely for up to seven years.
