Health Reimbursement Arrangement (HRA)
The “Tax-Free Medical Expense Account” Funded by Your Boss
My first job out of college had a great health plan, but it also came with a Health Reimbursement Arrangement (HRA). My employer deposited $1,000 into this account for me at the beginning of the year. When I went to the doctor and had a $50 co-pay, I paid it and then submitted the receipt to the HRA administrator. They reimbursed me with that tax-free money. It was a fantastic perk that covered my entire deductible for the year. It’s an employer-funded account designed specifically to help employees pay for out-of-pocket medical costs.
My Employer Gave Me $5,000 Tax-Free for Healthcare: Understanding HRAs
A Powerful and Flexible Health Benefit
My friend works for a small tech company that offers an ICHRA (Individual Coverage HRA). Instead of a traditional group plan, the company gives each employee a tax-free allowance of $5,000 a year for healthcare. My friend uses this money to buy her own individual health plan on the ACA marketplace. She chose a plan that was perfect for her needs. The HRA then reimburses her for the monthly premiums. It’s a modern benefit that gives employees the ultimate flexibility and choice, while providing the employer with a predictable, fixed cost.
HRA Explained: How Your Boss Can Help Pay Your Medical Bills
Your Employer’s “Tab” at the Doctor’s Office
Think of an HRA like this: your employer sets up a “tab” for you to use for medical expenses. Let’s say they put $1,500 in your HRA for the year. When you have a medical bill—like your health insurance deductible or a prescription co-pay—you pay for it first. Then, you submit your receipt to the HRA plan administrator, and they pay you back from that tab with tax-free dollars. It’s a way for your employer to directly help you cover your out-of-pocket healthcare costs without just giving you a taxable raise.
QSEHRA vs. ICHRA: Decoding Different Types of Small Business HRAs
Two Paths for Employer-Funded Health Benefits
These are two popular HRA options for small businesses. A QSEHRA (Qualified Small Employer HRA) is for companies with fewer than 50 employees. It has an annual contribution limit set by the IRS. An ICHRA (Individual Coverage HRA) is more flexible, has no company size limit, and has no contribution limit. The biggest difference is that with an ICHRA, employees must be enrolled in an individual health insurance plan to use the funds, which they can use to reimburse premiums. A QSEHRA has more lenient rules.
Using Your HRA to Pay Health Insurance Premiums (ICHRA Rules)
A New Way to Offer Health Benefits
The most powerful feature of a modern Individual Coverage HRA (ICHRA) is that it can be used to reimburse employees for their individual health insurance premiums. My cousin’s company dropped their traditional group plan and now offers an ICHRA. They give each employee $400 a month. He went to the ACA marketplace, bought a plan that he liked for $450 a month, and the company’s ICHRA reimburses him for the first $400. This turns health insurance into a flexible, defined-contribution benefit, similar to a 401(k).
What Expenses Are Eligible for HRA Reimbursement?
More Than Just Doctor Co-Pays
An HRA can be used to reimburse a wide range of “qualified medical expenses,” as defined by the IRS. This includes your health insurance deductible, co-pays for doctor visits and prescriptions, and even things that your insurance might not cover, like dental cleanings, eyeglasses, contact lenses, and LASIK surgery. Your employer has some flexibility in the plan design, so they might restrict it to only cover expenses related to your medical plan, but most HRAs cover the full range of IRS-approved expenses.
Do HRA Funds Roll Over Year to Year? It Depends on the Plan!
The “Use It or Lose It” Question
This is a key detail you must check in your specific HRA plan documents. Some HRAs are designed so that any unused funds at the end of the plan year are forfeited back to the employer. This is a “use it or lose it” design, similar to an FSA. However, many modern HRA designs, including ICHRAs, allow the funds to roll over from year to year. This allows you to build up a significant balance over time to cover major future medical expenses. Always check your plan’s specific rollover rules.
HRA vs. HSA vs. FSA: Which Account is Which?
A Quick Guide to the Health Account Alphabet Soup
It’s easy to get these confused. An HSA (Health Savings Account) is a personal savings account that you own; it requires an HDHP, the funds never expire, and it’s triple-tax-advantaged. An FSA (Flexible Spending Account) is an employer-owned account that you contribute to; the funds are “use it or lose it” each year. An HRA (Health Reimbursement Arrangement) is an employer-owned account that is 100% funded by your employer. Its rollover rules depend on the plan design. The key difference is who owns and funds the account.
How HRAs Can Make High-Deductible Plans More Affordable
The Employer’s Contribution to Your Deductible
My company offers a high-deductible health plan with a $3,000 deductible. To make this less scary for employees, they also offer an HRA and they fund it with $1,500 each year. This effectively cuts my personal risk for the deductible in half. If I have a major medical expense, my employer is on the hook for the first $1,500 of my deductible. This HRA contribution makes it much easier and less risky for me to choose the low-premium high-deductible plan, which also saves the company money.
Submitting Claims for HRA Reimbursement: The Process
Keep Your Receipts and EOBs
The process for getting reimbursed from my HRA is simple. After I visit the doctor, I wait for my health insurance to process the claim. They then send me an “Explanation of Benefits” (EOB) showing what they paid and what my responsibility is. I then log into my HRA online portal, upload a copy of the EOB as proof of the expense, and request a reimbursement. A few days later, the money is direct-deposited into my bank account. The key is to keep your EOBs organized.
Can I Have an HRA and an HSA Simultaneously? Usually Not (Restrictions Apply)
A Complicated Combination
Generally, you cannot have an HRA and contribute to an HSA at the same time. The reason is that an HRA is considered “other health coverage” which can disqualify you from making HSA contributions. There are a few exceptions. You can have a “limited-purpose HRA” that only covers dental and vision expenses. You can also have a “post-deductible HRA,” which only starts reimbursing you after you’ve met your high deductible. But a general-purpose HRA and an HSA are usually a non-compatible pair.
What Happens to Your HRA if You Leave Your Job? (Usually Forfeited)
The Money Belongs to Your Employer
This is a critical point to remember. An HRA is an employer-owned account. It is not a personal savings account. If you leave your job, any unused money remaining in your HRA is forfeited and goes back to the employer. You cannot take it with you. This is a major difference from an HSA, where the money is yours to keep forever, regardless of your employment. Because HRA funds are “use it or lose it” upon termination, you should try to use any available balance for eligible expenses before your last day.
Using HRAs to Cover Dental and Vision Expenses
A Great Way to Pay for Out-of-Pocket Care
My HRA is my secret weapon for paying for dental and vision care. My company puts $500 in my account each year. My health plan doesn’t cover dental or vision. When I go for my annual dental cleaning, which costs $150, I pay for it out-of-pocket and then submit the receipt to my HRA for a tax-free reimbursement. I do the same thing when I buy my annual supply of contact lenses. The HRA provides a flexible, tax-free way to cover the routine dental and vision costs that my primary health plan doesn’t.
Are HRA Reimbursements Taxable Income? No!
A Key Advantage of This Benefit
The money you receive from your HRA to pay for qualified medical expenses is completely tax-free. It is not considered part of your taxable income, and you do not have to pay FICA taxes on it. This makes it a much more valuable benefit than an equivalent raise. If your employer gave you a $1,000 raise, you might only take home $700 after taxes. But with a $1,000 HRA contribution, you get to use the full $1,000 for your healthcare needs. This tax-free nature is a win-win for both you and your employer.
How HRAs Benefit Both Employers and Employees
A Win-Win for Health Benefits
HRAs are a win for everyone. For employees, they get tax-free money from their employer to help cover their out-of-pocket medical costs, which makes healthcare more affordable. For employers, an HRA provides a way to offer a meaningful health benefit with predictable, controllable costs. The employer sets the budget, and they only pay for the funds that employees actually use. This cost control and flexibility are why HRAs are becoming an increasingly popular benefits solution, especially for small businesses.
Understanding Your Specific Company’s HRA Plan Design
Every HRA Can Be Different
It is crucial to understand that “HRA” is a general term, and your company’s specific plan can have its own unique rules. You need to read your Summary Plan Description (SPD) to find the answers to key questions. How much does the employer contribute? Do the funds roll over at the end of the year? Can the funds be used for just medical expenses, or also for dental and vision? Can you use it to reimburse premiums (if it’s an ICHRA)? Never assume your HRA works the same way as a friend’s at another company.
Integrating HRAs with Individual Marketplace Plans (ICHRA Scenario)
The Modern Approach to Group Benefits
The Individual Coverage HRA (ICHRA) is a revolutionary new model. My friend’s company in another state offers one. The company provides a monthly HRA allowance. My friend then went to her state’s ACA marketplace and used that allowance to buy an individual plan that perfectly fit her needs and included her preferred doctors. The ICHRA allows the employer to offer a valuable, tax-free health benefit while giving the employee the ultimate freedom to choose their own insurance plan. It’s the future of flexible employee benefits.
The Future of HRAs: Growing Trend for Employer Benefits?
A Move Towards Flexibility and Defined Contributions
Yes, HRAs, particularly the ICHRA, are seen as a major trend in the future of employee benefits. As traditional group health insurance becomes more expensive and complex, more employers are attracted to the “defined contribution” model of an HRA. It allows them to set a fixed, predictable budget for health benefits while empowering their employees with more choice and flexibility. The shift from a defined-benefit pension to a 401(k) is now being mirrored by the shift from a defined-benefit health plan to an HRA.
Can Self-Employed Individuals Have an HRA? (Limited Options)
A Complicated Situation for Sole Proprietors
Generally, a sole proprietor cannot set up an HRA for themselves, as you cannot be both the employer and the employee. However, there is one key exception. If the sole proprietor’s spouse is a legitimate, W-2 employee of the business, the sole proprietor can set up an HRA for their spouse-employee. The HRA can then be used to reimburse the medical expenses of the spouse and the rest of the family, including the sole proprietor. This is a complex strategy that should be set up with the guidance of a tax professional.
HRAs for Retirees: Post-Employment Health Funding
A Way to Continue Supporting Former Employees
Some companies, particularly those in the public sector, may offer a Retiree HRA. When an employee retires, the company will make a final contribution, or a series of contributions, into an HRA for the retiree to use. The retiree can then use these tax-free funds to pay for their out-of-pocket medical expenses in retirement, or even to reimburse themselves for their Medicare Part B or Medigap premiums. It is a valuable and flexible way for an employer to provide a post-employment health benefit to their loyal, long-term employees.
HRA: Leveraging Employer Dollars for Your Healthcare Needs
The Bottom Line
A Health Reimbursement Arrangement is a powerful and flexible benefit that allows your employer to give you tax-free money to help pay for your healthcare costs. Whether it’s integrated with a traditional group plan to cover your deductible, or it’s an ICHRA that allows you to buy your own individual policy, an HRA is a valuable tool. It makes healthcare more affordable for you and provides cost-control for your employer. If your company offers an HRA, make sure you understand how it works so you can take full advantage of this fantastic perk.