If you’re like most people, you’re probably more familiar with a Health Savings Account (HSA) or a Flexible Spending Account (FSA) than a Health Reimbursement Arrangement (HRA). While the former share some similarities, the latter is very different. In fact, unlike an HSA or FSA, an HRA is not an account at all – hence the name!
A Health Reimbursement Arrangement (HRA) is an employer-funded plan that reimburses employees for qualified medical expenses. Depending on the type of HRA, funds may be used to reimburse premiums, deductibles, and copays for health, vision, and dental insurance. Employers may claim a tax deduction for the reimbursements they make through an HRA, and reimbursements received by the employee are generally tax-free.
The employer decides how much to put into the plan, and employees can be reimbursed for medical expenses incurred up to that limit. Employees cannot withdraw funds in advance -- they must incur the expense first, then have it reimbursed. Employees can be reimbursed at the time of service if the employer provides an HRA debit card. Expenses may be reimbursed in a different plan year than the one in which they are incurred.
An HRA can be used for medical expenses such as prescription medications, insulin, an annual physical exam, crutches, birth control pills, care from a psychologist or psychiatrist, substance abuse treatment -- even transportation costs incurred to get medical care. It also can cover the cost of COBRA. Employees can use the money to cover medical, dental, and vision costs for their spouse and dependents.
An HRA may not be used for expenses to maintain general health, such as vitamins. Some expenses that do not qualify: teeth whitening, maternity clothes, funeral services, health club membership fees, controlled substances, childcare for a healthy baby, marriage counseling, and non-prescription medications.
Be aware that an employer is permitted to exclude certain medical expenses even though the expenses are qualified by the IRS. An employer’s list of reimbursable medical expenses are outlined in its HRA plan document provided to participating employees.
The money must be used by the end of the plan year, although some employers allow amounts to carry over with a grace period into the next year. If there is no grace period, you’ll need to submit your expenses for reimbursement before the end of the plan year. The grace period is set by the employer.
For employers:
For employees:
There are a few variations of the HRA. Here is a brief overview of how they are used.
Note: QSEHRAs and ICHRAs can stand on their own, providing two different ways of helping employees obtain their own health coverage. However, EBHRAs must be offered in conjunction with a group health insurance plan.
There’s certainly a lot to know here. We’d be happy to walk you through the many nuances of an HRA.
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How Can I Use My Health Care Savings in Retirement?
Are Business Owners Eligible for an HRA?