Understanding Health Reimbursement Arrangement- The Ultimate Guide for Beginners

Health reimbursement arrangement (HRA) is currently one of the most popular health plans that employers offer to their employees. Some employees might already be enrolled in an HRA, but not all of them necessarily understand how it works. In this guide, we will be discussing everything one needs to know about HRAs and how they work.

What is a Health Reimbursement Arrangement (HRA)?

A health reimbursement arrangement (HRA) is a health plan that allows employers to reimburse employees for their eligible medical expenses. This type of plan is tax-advantaged, meaning that both the employer’s contributions and the employee’s reimbursements for qualified medical expenses are exempt from income tax.

How Does an HRA Work?

1. Employer Contribution

An HRA is funded solely by the employer. This means that the plan sponsor will set a fixed amount of money for each employee’s HRA account. The employer has complete control over the contribution amount, and it can change from year to year.

2. Employee Medical Expenses

Once the employee incurs an eligible medical expense, they can submit a claim to the HRA administrator for reimbursement. The reimbursement is then made from the employee’s HRA account, which can cover the entire amount or a portion of the cost.

3. Plan Design

The HRA plan design can differ from one employer to another. The plan sponsor can customize the plan design according to their preference. For instance, some employers might design their HRA to only cover a specific set of expenses such as prescriptions or co-payments, while others might offer a more comprehensive plan that covers a wider range of healthcare expenses.

Types of HRAs

There are different types of HRAs, including:

1. Integrated HRA

This type of HRA works with a high-deductible health plan (HDHP). The employer will establish an HRA that covers a portion of the employee’s deductible.

2. Group Coverage HRA

The employer contributes to a group health plan on behalf of their employees, which is then paired with an HRA that is used to reimburse the cost of medical expenses.

3. Retiree HRA

This type of HRA reimburses medical expenses for retirees that are not eligible for Medicare.

Benefits of HRAs

1. Cost Savings

Employers can save money by offering an HRA. This is because the employer has complete control over the contribution amount, meaning that they can set a budget for their healthcare costs.

2. Tax-Advantaged

As previously mentioned, HRAs offer tax advantages. Both employer contributions and employee reimbursements are tax-free.

3. Employee Choice

Employers can offer customized HRAs that suit their employees’ healthcare needs. This gives employees more control over their healthcare expenses.

Conclusion

In summary, HRAs are becoming increasingly popular among employers as a cost-effective way to provide healthcare to their employees. They offer customizability, tax advantages, and cost savings. Employees in an HRA plan can submit eligible medical expenses for reimbursement from their HRA account. Understanding how HRAs work can help employees take control of their healthcare costs, and employers can save money in the long run.