The Benefits and Drawbacks of Using a Health Reimbursement Arrangement

Introduction

A Health Reimbursement Arrangement (HRA) is an employer-funded health benefit plan that reimburses employees for their medical expenses. In simple terms, it is a tax-advantaged account that employers can use to help their employees pay for healthcare expenses. In this article, we will discuss the benefits and drawbacks of using an HRA.

Benefits of Using an HRA

1. Cost Savings: HRAs can help employers save money on healthcare costs. This is because they allow employers to set aside funds tax-free for employees to use towards healthcare expenses. As a result, both the employer and employee can save on taxes.

2. Flexibility: HRAs offer more flexibility than traditional healthcare plans. For instance, employers can choose what expenses are covered and cap the amount they will reimburse. This allows them to customize the plan to their specific needs.

3. Increased Employee Satisfaction: HRAs can increase employee satisfaction by offering them more control over their healthcare expenses. Moreover, employees can use funds from the HRA to pay for dental, vision, and other healthcare expenses that are not covered by their insurance.

4. Encourages Health Care Utilization: Since the HRA covers healthcare expenses, employees are likely to use healthcare services and get necessary medical attention. This can lead to earlier diagnosis and treatment of health conditions.

Drawbacks of Using an HRA

1. Administrative Burden: HRAs can be quite complex and require significant administrative work to set up and maintain. Employers need to keep track of the funds, expenses, and reimbursements to comply with IRS rules.

2. Limited Funds: HRAs may have limited funds, and once the funds are depleted, employees may have to pay for their healthcare expenses out-of-pocket.

3. Limited Coverage: Employers have control over what expenses are covered by the HRA. This may not be suitable for all employees, especially those with chronic health conditions or who require specialized medical services.

4. Not Portable: HRAs are tied to the employer and do not move with the employee if they change jobs. This may limit the employee’s ability to access healthcare benefits.

Conclusion

HRAs are an attractive healthcare benefit option for many employers. They offer cost savings, flexibility, increased employee satisfaction, and encourage healthcare utilization. However, they come with some drawbacks, such as administrative burden, limited funds, limited coverage, and lack of portability. Employers should carefully consider these factors when deciding whether to offer an HRA as part of their benefits package.