Health Reimbursement Arrangements

A health reimbursement arrangement (HRA), also commonly (and mistakenly) called a health reimbursement account, is an employer funded health benefit. Confirmed in 2002, the IRS approved the use of HRAs to reimburse employees for their qualified medical expenses and health insurance premiums.

HRAs are not health insurance. Rather, they provide an allowance of dollars on a tax-free basis for employees to purchase health care services. The arrangement is especially great for smaller businesses who may be unable to afford group health insurance or extensive coverage.

Benefits for the Employee

Employees benefit from HRAs as out-of-pocket expenses such as deductibles, co-pays, and coinsurance can be paid for using HRA dollars provided by their employer. If the same dollars are instead used to increase an employee’s pay, taxes would eat away 20% to 40% of their purchasing power.

Benefits for the Employer

Employers benefit by attracting and retaining talent. Financially, HRA contributions may be deducted as a business expense, reducing an employer’s FICA and FUTA taxes. HRAs are also highly flexible, allowing employers to mold the plan to meet their specific organization’s benefits needs. Any unused dollars may be retained by the employer.

How HRAs Work

Health reimbursement arrangements are relatively simple. There can be a few variations between plans, but in general, each follows the same configuration:

  1. The employer establishes an allowance amount for their employees.
  2. Employees purchase health products and services.
  3. Employees submit proof of their purchases.
  4. The employer reviews the purchase receipts.
  5. The employer reimburses employees for the purchases made.

HRAs do not need to be pre-funded. Instead, employers can reimburse employees as they submit the proper documentation. So long as the expenses are qualified (see the whole list here), both parties will benefit.

There are specific steps required before you take advantage of an HRA. Contact our office to review your options and select a plan that bolster your benefits and your bottom line.