HRAs & MSAs (The Lesser-Known Accounts)

HRAs & MSAs (The Lesser-Known Accounts)

What is a Health Reimbursement Arrangement (HRA)?

An HRA is an employer-funded group health plan where the employer reimburses employees tax-free for qualified medical expenses up to a fixed dollar amount per year. Unlike HSAs or FSAs where employees contribute their own money (pre-tax), HRAs are funded solely by the employer. It’s not an account the employee owns, but rather a promise from the employer to reimburse expenses. Sarah’s company didn’t offer a group health plan but provided a $3,000 HRA, which she used to help pay premiums for her individual Marketplace plan.

How HRAs Work: Employer-Funded Accounts

The employer decides how much money to make available in the HRA for each employee per year. The employee incurs eligible medical expenses (which can include premiums for individual coverage with certain HRA types, or just deductibles/copays). The employee then submits proof of these expenses to the employer (or a third-party administrator). The employer reimburses the employee tax-free up to the available HRA amount. Mark submitted his EOB showing a $500 deductible payment, and his employer reimbursed him $500 from his HRA funds.

Who Controls the HRA? (The Employer)

The employer retains full control over the HRA. They decide the contribution amount, what expenses are eligible for reimbursement (within IRS guidelines), whether unused funds roll over year-to-year, and what happens to the funds if the employee leaves the company (usually forfeited). The employee does not own the account or the funds directly; they only have access to reimbursements as defined by the employer’s HRA plan document. Lisa wished her employer allowed HRA rollovers, but their plan rules stated unused funds were forfeited annually.

Types of HRAs (QSEHRA, ICHRA)

Several types exist, differing in employer eligibility and how funds can be used. QSEHRA (Qualified Small Employer HRA): For small employers (under 50 employees) not offering a group plan. Funds can reimburse premiums and medical expenses. ICHRA (Individual Coverage HRA): For employers of any size. Can be offered instead of a traditional group plan. Must be used to reimburse premiums for individual market plans (like Marketplace plans) and potentially other medical expenses. Other types like Group Coverage HRAs supplement existing group plans.

Using HRA Funds for Premiums and Medical Expenses

How HRA funds can be used depends on the specific type of HRA. ICHRAs and QSEHRAs are specifically designed to allow employees to purchase their own individual health insurance and use the HRA funds tax-free to reimburse those premium costs, along with other qualified medical expenses (like deductibles/copays). Group Coverage HRAs, however, are typically integrated with an employer’s group health plan and primarily reimburse cost-sharing amounts like deductibles, not premiums. Ben used his ICHRA funds first to pay his monthly Marketplace premium, then submitted claims for doctor copays.

HRAs vs. HSAs and FSAs: Key Differences

Funding: HRAs are employer-funded only. HSAs/FSAs are primarily employee-funded (pre-tax), though employers can contribute to HSAs. Ownership: Employees own their HSAs (portable). FSAs/HRAs are employer-controlled arrangements (not portable). Rollover: HSA funds always roll over. FSA rollover is limited/optional. HRA rollover is determined by the employer. Plan Req: HSAs require HDHPs. FSAs/HRAs generally do not (though Group HRAs often pair with HDHPs). The employer funding and control are key HRA distinctions.

Tax Treatment of HRA Reimbursements (Tax-Free)

Reimbursements received by an employee from an HRA for qualified medical expenses (including premiums for ICHRAs/QSEHRAs) are generally excluded from the employee’s gross income. This means the money received is tax-free, providing a significant benefit similar to using pre-tax FSA/HSA dollars. When David received his $1,000 HRA reimbursement check for therapy bills, he didn’t have to report it as income on his tax return, saving him taxes on that amount.

Can HRA Funds Roll Over Year to Year? (Employer Decides)

It’s entirely up to the employer’s plan design. Some HRA plans allow unused funds to roll over from one year to the next, allowing employees to accumulate funds for larger future expenses. Other employers design their HRAs with a “use it or lose it” feature similar to FSAs, where unused amounts are forfeited at the end of the plan year. Always check your specific employer’s HRA plan document! Maria was happy her employer’s HRA allowed rollovers, letting her save up funds over two years for anticipated dental work.

What Happens to Your HRA if You Leave Your Job? (Usually Forfeited)

Because the HRA is an employer-funded arrangement, not an employee-owned account, any remaining balance is typically forfeited when you leave employment. You generally cannot take the HRA funds with you or continue submitting claims after your termination date (though some plans might allow claims for expenses incurred before termination). This lack of portability contrasts sharply with HSAs. When leaving his job mid-year, Ken had to quickly submit claims for recent expenses before losing access to his remaining HRA balance.

Understanding Your Specific Employer’s HRA Rules

Reading your employer’s official HRA plan documents and Summary Plan Description (SPD) is crucial. These documents detail: The annual amount your employer provides. Exactly which expenses are eligible for reimbursement (premiums? medical only?). Whether unused funds roll over or are forfeited. How to submit claims and deadlines. What happens upon termination. Relying on assumptions can lead to missed reimbursements or forfeited funds. Always refer to the official plan rules provided by your employer or the HRA administrator.

What is a Medical Savings Account (MSA)? (Archer MSAs)

Archer MSAs were predecessors to HSAs, established in the late 1990s for self-employed individuals and employees of small businesses (50 or fewer employees) covered by a high-deductible health plan. They allowed tax-deductible contributions to a savings account paired with the HDHP. However, the program was limited, and no new Archer MSAs could be established after 2007, though existing ones could potentially continue. HSAs largely replaced Archer MSAs with broader eligibility. Finding information on them is rare now.

Who is Eligible for an MSA? (Very Limited: Self-Employed or Small Biz with HDHP – Mostly Phased Out)

Eligibility for new Archer MSAs ended in 2007. Originally, they were restricted to either self-employed individuals or employees of small businesses (50 or fewer employees) that established an MSA program, and the individual had to be covered by an MSA-qualified high-deductible health plan. Due to the program’s sunset, active Archer MSAs are now very uncommon. The main type of MSA still relevant today is the Medicare MSA.

Medicare Medical Savings Accounts (Medicare Advantage MSAs)

These are a specific type of Medicare Advantage (Part C) plan available to Medicare beneficiaries. They combine a high-deductible health plan with a special medical savings account funded by Medicare. Medicare deposits money into the savings account, and the beneficiary uses that money to pay for healthcare costs until the high deductible is met. After the deductible, the plan pays 100% for Medicare-covered services. Enrollment in these plans is relatively low compared to other Medicare Advantage options.

How Medicare MSAs Work (High Deductible + Savings Account)

1. Enroll in a Medicare MSA plan (must have Medicare Parts A & B). 2. Medicare deposits a fixed amount of money annually into your dedicated MSA bank account. 3. You use these funds tax-free to pay for Medicare-covered services (Parts A & B) towards the plan’s high deductible. 4. Once your spending meets the deductible, the MSA plan (not the account) covers 100% of subsequent Medicare-covered costs. Unused account funds roll over. Enrolled in a Medicare MSA, Betty used the deposited funds to pay doctor bills until she hit the plan’s $5,000 deductible.

Comparing Medicare MSAs to Other Medicare Options

Medicare MSAs offer potentially lower premiums (sometimes $0 beyond the Part B premium) and give beneficiaries control over the deposited funds. However, they have very high deductibles, offer no prescription drug coverage (requiring a separate Part D plan), and may not provide extra benefits like dental/vision found in some other Medicare Advantage plans. They suit beneficiaries comfortable managing healthcare spending, seeking catastrophic coverage, and wanting control over account funds, but are less predictable than standard MA plans or Medigap.

Why MSAs Are So Uncommon Today

Archer MSAs were effectively replaced by the more flexible and broadly available Health Savings Accounts (HSAs) after 2007. Medicare MSAs, while still available, have low enrollment compared to other Medicare Advantage plans, likely due to their high deductibles, lack of integrated drug coverage, and complexity compared to more traditional MA HMOs/PPOs or Original Medicare + Medigap options which offer more predictable cost structures. Their niche appeal keeps them relatively uncommon.

The “Never Pay Taxes Again” Joke: The Reality of MSAs

The video’s joke plays on the tax advantages, but it’s hyperbole. Archer MSAs and Medicare MSAs do offer tax benefits – contributions/deposits are often tax-free, growth can be tax-free, and withdrawals for qualified medical expenses are tax-free. However, they don’t eliminate all taxes. Withdrawals for non-medical purposes (especially from Archer MSAs before 65) would be taxed and penalized. They offer significant healthcare-related tax savings, not complete tax immunity.

Potential Benefits of HRAs for Employees

If offered, HRAs provide employer-funded money to help cover healthcare costs tax-free, reducing the employee’s financial burden for premiums (ICHRAs/QSEHRAs) or out-of-pocket expenses like deductibles and copays (Group HRAs). This can make high-deductible plans more manageable or help employees afford individual coverage they choose themselves. Receiving $2,000 in her QSEHRA allowed part-time employee Chloe to afford a better individual plan than she could have otherwise.

Potential Downsides of HRAs (Lack of Control)

The main downside is the lack of employee control. The employer dictates the amount, rollover rules, and eligible expenses. Funds are forfeited upon leaving the job. Reimbursement processes can sometimes be cumbersome. It’s not a portable savings vehicle like an HSA. If the employer offers a small HRA amount or doesn’t allow rollovers, its utility might be limited compared to having access to contribute significantly to an employee-owned HSA or FSA. Mark wished he could control how his HRA funds were invested like an HSA.

Using HRAs to Buy Individual Market Coverage (ICHRA)

The Individual Coverage HRA (ICHRA) is a specific HRA type allowing employers of any size to provide tax-free funds for employees to purchase their own health insurance plans from the individual market (e.g., ACA Marketplace). This gives employees plan choice while letting employers offer benefits with predictable costs. Employees must be enrolled in qualifying individual coverage to use ICHRA funds for premiums and expenses. Small business owner Dave offered an ICHRA so his employees could pick Marketplace plans suiting their needs.

Small Business HRAs (QSEHRA) Explained

The Qualified Small Employer HRA (QSEHRA) is for businesses with fewer than 50 full-time equivalent employees that do not offer a group health plan. It allows these small employers to provide tax-free funds (up to annual limits) for employees to reimburse premiums for individual health insurance, as well as other qualified medical expenses. It’s a way for very small businesses to help employees with healthcare costs without the complexity of sponsoring a traditional group plan. Startup founder Lisa used a QSEHRA for her team.

Navigating HRA Paperwork and Reimbursement

Using an HRA typically requires submitting claims and proof of expense (receipts, EOBs) to the employer or a third-party administrator. Understand the submission process (online portal? paper forms?), required documentation, and deadlines. Keep copies of everything submitted. Reimbursement might come via paycheck or direct deposit. Staying organized is key to getting timely, accurate reimbursements. Maria kept a dedicated folder for HRA receipts and submitted claims monthly through the online portal her employer used.

The Complexity of Combining HRAs with Other Plans/Accounts

Combining HRAs with other benefits can be complex. For example, having an HRA might affect eligibility for Marketplace subsidies (especially ICHRAs). You generally cannot contribute to an HSA if covered by a general-purpose Group Coverage HRA that reimburses expenses below the HDHP deductible. Coordinating reimbursements between an HRA and an FSA (if offered) also requires understanding which plan pays first according to specific rules. Always clarify coordination rules if multiple account types are involved.

Are HRAs Making a Comeback?

HRAs, particularly ICHRAs and QSEHRAs, have seen renewed interest in recent years as employers seek flexible ways to offer health benefits amidst rising traditional group plan costs. They allow for more defined contribution approaches and greater employee choice in selecting individual plans. While not replacing traditional group coverage entirely, they represent a growing alternative, especially for small to mid-sized businesses or those with diverse workforces. Their flexibility suggests they may continue to gain traction.

Understanding the Fine Print of HRA and MSA Plans

For HRAs, carefully read the employer’s plan document/SPD to know the exact reimbursement amount, rollover rules, eligible expenses, claim process, and termination rules. For Medicare MSAs, understand the deposit amount, high deductible, lack of drug coverage (need separate Part D), and how the plan covers services after the deductible vs. how the account funds are used before it. These lesser-known account types have specific nuances critical to grasp to use them effectively and avoid surprises.