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(HRA) Health Reimbursement Arrangements
Health Reimbursement Arrangements (HRA) are health accounts, sponsored by employers for their employees in order to accumulate funds for future medical needs. These accounts are designed to allow the employer to “partially fund” some of the medical expenses traditionally covered by insurance in the hope of reducing the premium of the health plan. The HRA is also designed to allow the employee to become a better “consumer” of medical expenses in that once the employers funds are exhausted, some of the financial burden will fall on the employee.
How does an HRA work?
An HRA is always set up by the employer for every employee as coverage to their medical expenses and a certain amount of fund is allocated to these accounts every year. Funds utilized in HRAs are exempted from tax and can be used as a reimbursement of certain qualified expenses related to health issues like prescriptions or other expenses traditionally covered by health insurance. The allowable reimbursements have the flexibility to be treatment specific (Wellness) or can only be used if the employee utilizes an in-network physician or facility. There is quite a bit of flexibility with the usage of the funds.
Expenses eligible to be covered by an HRA can be any medical care that includes payment for diagnosing, curing, mitigating, treating and preventing the disease.
Certain eligible expenses under HRA (Internal Revenue Code Sec 213d expenses) are:
- Artificial limbs
- Blood transfusion
- Dental care
- Metabolism tests
- X-rays and many more.
- Vision including eye glasses, contacts, lasik
There are quite a lot of scenarios where an HRA may be paired with different types of health plans. Many times you will see plans that have doctor office co-pays removed from the plan and an HRA account to set-up doctor visits. Some of the plans have high deductibles and the HRA is set-up to pay after a specific dollar amount is paid out by the employee. The HRA plans offered by companies are often paired with high-deductible health plans (HDHP) which offer no co-pays for office visits or prescriptions. If the funds accumulated in the HRA are exhausted, there is a gap where the employee pays the expenses. After the gap has been paid, the HDHP plan kicks in and many times starts covering 100 percent of the costs. If funds still remain in the HRA at the end of the year, it can be rolled over for the next year, thus contributing to your medical savings.
HRA vs. HSA
An HSA (Health Savings Account) is often confused with an HRA, but they are distinctly different. The employer is the sole funder of an HRA versus anyone - employer or employee - can fund the HSA. The advantage of an HRA is that most of the time employees with HSA’s do not fund the bank account and are left with high deductible plans that have significant out of pocket costs.
There is a huge difference between these two plans when we look at the areas of ownership. The employees own the HSAs, while the employers own the HRAs. If an employer contributes into an HSA the employee owns those dollars. Should the employee leave, they take with them all dollars contributed into their HSA account. The HRA is owned by the employer and is not payable if the employee terminates employment unless elected on COBRA.
HSA’s can be used by employees for funds withdrawal in case of qualified and non-qualified medical expenditures. However, if you are using the funds for non-qualified medical expenses, you are likely to be charged a 10 percent excise tax as penalty. In this case, it becomes very hazardous for the employers as they end up contributing to such an account which they did not intend to. But in case of an HRA, the employers will not reimburse until the time they are assured of a qualified medical expense.
Due to government regulations an HSA requires the use of a qualified HDHP insurance policy, which is not the same with an HRA, thus making HRA a more flexible option. The government also controls the dollar amount of the HDHP plans that are eligible for contribution and the amount that may be contributed. This is not the same with HRA plans.
An HSA along with HDHP allows both the parties to enjoy the benefits of health care but the HRA does give the employer more control and can also create a richer benefits plan then an HSA.
Setting up an HRA?
It is quite easy to set up an HRA and is usually done by the employer utilizing a third-party administrator. The HRAs help the employer and employees by providing enriched coverage at a potentially lower cost. There is risk for the employer and certain business owners, and family members are not eligible for the HRA, but it is one of the most flexible benefits plans for businesses.