Understanding Health Reimbursement Arrangements (HRAs)

A Health Reimbursement Arrangement (HRA) is an employer-sponsored benefit designed to help employees manage out-of-pocket medical expenses. HRAs provide tax advantages for both employers and employees, allowing for reimbursement of qualified medical costs—ranging from hospital visits to prescription medications. This article explores the intricacies of HRAs, their types, advantages, limitations, and comparisons with other health-related arrangements.

Key Features of an HRA

• Employer-Funded: HRAs are funded solely by the employer, who determines the contribution amount for each eligible employee, maintaining consistency across employee classes.
• Reimbursement Structure: Employees must incur eligible medical expenses before seeking reimbursement, as HRAs do not allow preemptive withdrawals.
• Tax Benefits: Employer contributions to HRAs are tax-deductible, and reimbursements received by employees are generally tax-free.

Types of Health Reimbursement Arrangements

HRAs come in various forms, each serving distinct purposes and populations:

1. Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

This arrangement is tailored for small businesses with fewer than 50 full-time employees. QSEHRAs allow employers to reimburse employees for individual health insurance premiums and medical expenses not covered by insurance.

• 2023 Contribution Limits: Up to $5,850 for individual employees and $11,800 for family coverage.
• Tax Advantages: Like other HRAs, the reimbursements are tax-free for employees and tax-deductible for employers.

2. Individual Coverage HRA (ICHRA)

Launching in January 2020, the ICHRA allows employees to purchase individual health insurance plans and be reimbursed for premiums and qualified expenses.

• Flexibility: ICHRAs permit employees to select a health plan that best fits their needs, promoting personalized healthcare solutions.
• Premium Tax Credit Eligibility: Employees may qualify for premium tax credits based on the affordability of the employer's ICHRA.

3. Excepted Benefit HRA (EBHRA)

Designed for employees who have traditional group health insurance, EBHRAs reimburse up to $1,950 annually for certain qualified expenses.

• Coverage Options: Employees can use EBHRA funds for short-term health insurance, dental and vision premiums, and various medical expenses, highlighting their versatility.

Benefits of Health Reimbursement Arrangements

HRAs provide significant advantages, including:

1. Wide Range of Eligible Expenses: HRAs cover numerous medical expenses like copayments, sneezing medications, and preventive care. This can ease many financial burdens for employees.
2. Supports Employee Autonomy: Employees can utilize HRAs to purchase individual health insurance that aligns with their healthcare needs.
3. Dependent Coverage: Funds can extend to reimburse medical expenses incurred by a spouse or dependents, promoting family health.

Limitations of Health Reimbursement Arrangements

While HRAs offer substantial benefits, there are notable limitations:

1. Qualified Expenses Only: Reimbursements are only available for medically necessary expenses. Many everyday expenses, such as vitamins or gym memberships, are typically excluded.
2. Non-Transferable: Unlike HSAs, HRAs are non-portable. If an employee leaves the company, they forfeit any remaining funds.
3. Employer Discretion on Reimbursements: Employers have the authority to define what constitutes a qualified expense under their specific HRA plan, potentially leading to inconsistencies and confusion.

Pros and Cons of HRAs

Pros

• Covers diverse medical expenses taxable to the employee.
• Allows reimbursement for purchasing individual insurance using pre-tax dollars.
• Provides financial predictability for employers through fixed contributions.

Cons

• Not usable for many discretionary spending categories.
• Requires upfront payment for medical expenses before reimbursement.
• Contributions depend solely on employer discretion.

Comparison with Other Health Arrangements

HRAs are commonly compared with other health-related financial options like Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA).

Flexible Spending Arrangement (FSA)

• Funded by Employees: Employees allocate part of their pre-tax salary for eligible medical expenses, capped at $3,050 in 2023.
• Use-it-or-lose-it Rule: Unspent funds generally expire by the end of the plan year—unless the employer permits a small rollover.

Health Savings Account (HSA)

• Portable Account: Completely owned by the employee, HSAs do not expire or become inaccessible upon changing employers.
• Eligibility: Must be paired with a high-deductible health plan (HDHP). Contributions are tax-deductible, and funds can be carried over indefinitely.

How to Use HRA Funds

Employees are encouraged to familiarize themselves with their specific HRA's terms, as the employer determines eligible medical costs. Common reimbursements might include:

• Hospital bills
• Physician copays
• Prescription medications

Employees should consult their employer’s outline of reimbursable expenses to avoid confusion regarding eligible costs.

Conclusion

A Health Reimbursement Arrangement is a valuable tool that employees can leverage to offset medical expenses, supported entirely by employer contributions. As various types of HRAs exist to cater to different group sizes and health insurance needs, understanding their functions, limitations, and benefits can empower employees to manage their healthcare more effectively. Whether through QSEHRAs, ICHRAs, or EBHRAs, employees stand to gain significant flexibility and reimbursement options while enjoying tax advantages for both sides. Understanding the nuances of HRAs relative to other arrangements can further assist employees in making informed decisions about their healthcare finances.