What is a health reimbursement arrangement?
Whether you work for a large employer or a small business, health reimbursement arrangements (HRAs) provide a tax-free way to cover medical costs.
An HRA essentially gives you a stipend to reimburse you for health care costs like insurance premiums, copays, prescriptions, and over-the-counter drugs, relieving some financial pressure, making them one of the most critical benefits employees seek.
This guide details everything you need to know about health reimbursement arrangements, including how HRA plans work, how they’re different from health savings accounts and flexible spending accounts, and what you can do with the funds.
What Is a Health Reimbursement Arrangement (HRA)?
Health reimbursement arrangements, sometimes called health reimbursement accounts, are employer-funded accounts that help employees and their covered dependents pay for out-of-pocket health care expenses. HRAs work in tandem with your employer-sponsored health insurance plan to reimburse things like your copays, deductibles, or prescription medication.
An HRA plan is a valuable tool to pay for medical costs not covered by your health plan. It reimburses you with tax-free money provided by the employer as an employee benefit.
How an HRA Works
Imagine you have a sick child who needs prescription medication. The copay for the brand-name drug (with no generic available) gives you sticker shock. Suddenly, high out-of-pocket bills overwhelm your monthly budget, forcing you to make some financial adjustments.
Fortunately, you submit a reimbursement request on your HRA and receive a check for the amount you spent at the pharmacy.
Employers set up HRA programs to provide extra funds for qualified medical costs you, your spouse, or your dependents incur. Employers are the sole source of HRA funds; employees cannot contribute to their HRA.
Every year, the participating employer determines how much they will contribute to your HRA. The IRS requires that every employee have access to the same amount of HRA funds. Fortunately, unused account balances roll over to the following year.
Types of HRAs
There are three types of health reimbursement arrangements. Which type you have access to depends on your employer’s circumstances.
Qualified Small Employer HRA (QSEHRA)
Small businesses employing fewer than 50 full-time workers can set up a qualified small-employer health reimbursement arrangement, also known as a small-business HRA.
These businesses are exempt from providing employer-sponsored health insurance. So employees must get their insurance through the national or a state marketplace if their employer doesn’t offer one.
Funds in your small-business HRA can subsidize health insurance premiums or refund medical expenses you pay out of pocket.
The IRS limits how much your employer can contribute to a small-business HRA. The amount changes with every tax year. For example, in 2022, the IRS capped employers’ contributions to $5,450 for self-only employees and $11,050 for employees with a family.
Individual Coverage HRA (ICHRA)
Some employers don’t offer employee health insurance but are willing to provide a stipend to cover the premiums. The individual coverage HRA helps employees pay for health insurance if their employer has no employee health care plan.
Since January 2020, individual coverage HRAs have created a new way for small employers to distribute tax-free money for health insurance. As a result, you can use your HRA funds to buy health insurance coverage through the HealthCare.gov or state marketplace or directly from a private insurer. Previously, rules prohibited employees from using HRA funds to pay for individual health insurance premiums.
If you’re 65 or older, you can use the individual HRA balance to cover Medicare Part A, Part B, and Part C (Medicare Advantage) premiums. If you are still working and on Medicare, your employer may require Medicare coverage verification each time you request reimbursement from the individual coverage HRA.
Group Coverage HRA (GCHRA)
High-deductible health plans (HDHPs) offer more significant savings to employers since the premiums are typically lower than traditional group health insurance plans. However, employees must pay medical bills in full until they meet the deductible, which is several thousand dollars.
So some employers offer a group coverage HRA in conjunction with HDHPs. Since HDHPs can have higher out-of-pocket expenses, the group coverage HRA helps close the gap between the high deductible and the employee’s medical needs.
HRA vs. HSA vs. FSA
In addition to HRAs, there are two other programs that complement health insurance plans: health savings accounts (HSAs) and flexible spending accounts (FSAs). Typically, they all work on a reimbursement basis, but some employers offer debit cards for direct access to funds.
HSAs are unique because the account goes with you after leaving an employer but can only work with HDHPs. Although it requires cash contributions, you control the money and can invest the HSA balance in stocks, bonds, and mutual funds.
FSAs are similar to HRAs. However, they’re known for use-it-or-lose-it rules (they don’t roll over each year), and employees can contribute through salary reduction.
HRAs, HSAs, and FSAs have some important differences that could affect which one’s right for you. Those include:
- Who funds it
- How much money can be added annually (individuals; families)
- Whether the employee pays taxes
- What type of health plans it works with
- Whether you can use it to pay health insurance premiums
- Whether unused funds roll over each year
- What happens to the funds when you leave the employer (portability)
Comparing the differences between HRAs, HSAs, and FSAs, you can see that there are pros and cons to each. So if you have access to more than one and can only fund one, consider the benefits and drawbacks carefully before deciding.
|Funding Source||Employer||Employer or worker||Employer or worker|
|Annual Cap (2022)||Unlimited on most||$3,650; $7,300||$2,850|
|Premium Coverage||Yes||No||Not usually|
Advantages & Disadvantages of HRAs
An HRA is a powerful tool to manage health care costs. Essentially, HRAs are free money for employees with great flexibility in how you choose to spend it. Plus, employers also win because they can deduct 100% of requested reimbursements from their taxes.
But there are advantages and disadvantages you should consider carefully.
HRAs have plenty of advantages for employers, such as their tax-deductible status. But HRAs have robust benefits for employees too.
- Contributions Are Not Taxable as Employee Income. Employees don’t pay income taxes on the amount their employer provides in an HRA, lowering their taxable income.
- Withdrawals Are Tax-Free. Employees pay no income taxes when making withdrawals for qualified medical expenses.
- The Balance Rolls Over Annually. Your HRA balance doesn’t expire, allowing you to use the rest in later years. So if your health was good last year, but you experience a new illness this year, your HRA surplus helps pay for unexpected doctor’s appointments, treatments, or hospitalization.
- You Can Use HRA Money for Many Things. HRAs have the most comprehensive list of qualified medical expenses. That includes (but isn’t limited to) medical bills and dental and vision expenses.
Although HRAs are a boon to employee health care protection, they have limitations too.
- You Must Have Health Insurance to Use the HRA. If you opt out of buying health insurance coverage, you’re not eligible to use an HRA.
- Your Plan Determines Qualified Medical Expenses. Your company’s HRA plan may cover things that other companies’ plans don’t. Check with your HRA administrator for a list.
- You Lose HRA Funds if You Leave the Employer. If you separate from the employer, you lose all funds in your HRA account. So if you’re planning a change, exhaust your HRA funds before departing.
- Your Employer Determines the Contribution Amount. Some employers opt for lower-cost group plans that force the employee to shoulder more financial responsibility. If the HRA contribution amount is low, the health care program may not offer the employee much protection.
- Employees Cannot Contribute to their HRA. Unfortunately, you cannot contribute part of your paycheck to your own HRA. Only HSAs and FSAs permit employee funding.
Health Reimbursement Arrangement FAQs
HRAs are great supplements to health insurance, but you probably have more questions. These answers will clear things up.
What Health Care Expenses Do HRAs Cover?
HRAs cover various costs not usually covered by health insurance, like:
- Routine doctor’s visits and copays
- Medical bills, including hospital stays
- Deductibles and coinsurance amounts
- Hospital copays and expenses
- Prescription medication
- Over-the-counter medicine
- Vision care (exams, glasses, contacts, and corrective surgery)
- Diabetic supplies (testing kits and blood glucose monitors)
These are just a few of the circumstances HRAs can cover. Some plans also include:
- Monthly premium payments toward health, vision, and long-term care insurance
- Acupuncture and chiropractic treatments
- Dental treatments and orthodontics (not premiums)
- Speech therapy
- Mental health care, such as talk therapy and alcoholic and drug addiction treatment
- Weight loss programs
- Service animal acquisition, care, and training
Since covered items vary among companies, check with your employer for more details about qualified medical expenses.
What Health Care Expenses Do HRAs Not Cover?
Essentially, HRAs only cover expenses directly related to treating a medical condition.
For example, HRAs will not reimburse you for gym memberships, child care, cosmetic procedures, marriage counseling, feminine hygiene products, and funeral expenses.
What Happens to Unused HRA Funds at the End of the Year?
Fortunately, HRAs roll over funds from one year to the next if you don’t use them. So healthy people can save HRA funds for a catastrophic health emergency.
However, if you change companies, your HRA balance returns to your employer.
Can I Get an HRA if I Don’t Have Health Insurance?
No, you must have health insurance to get an HRA. Either enroll in the employer’s group health insurance plan or a marketplace policy to be eligible for HRA benefits.
Can I Cash Out an HRA?
No, you must use all HRA funds for qualified medical expenses. You can only access the HRA funds by submitting a reimbursement request to your HRA plan. If you leave your employer, they retain your HRA balance.
What Happens to an HRA When I Leave a Job?
Because your employer paid for 100% of your HRA contributions, the money stays with them if you leave your job. Find a way to use up the HRA balance if you plan to change employers.
A health reimbursement arrangement is basically free money your employer gives you to spend on medical fees. The HRA funds are tax-free for you and tax-deductible for them.
HSAs are straightforward to use with your health insurance plan. For example, suppose you visit the doctor, then receive a $100 invoice two weeks later. You would pay the bill, submit your payment to your HRA program, and they would reimburse you for $100.
Another critical point is that the detailed list of covered expenses depends on your employer. Still, HRAs have the most generous reimbursement list of the three types of health accounts.