In today’s uncertain economic landscape, employee benefits have become an essential part of compensation packages. A good benefits package can set an organization apart from others when trying to attract and retain top talent. Health and wellness benefits are exceptionally common offerings as companies understand the value of fostering a healthy and thriving workplace. Alongside health insurance plans and employee wellness programs, many employers also offer some form of health reimbursement account.
HRAs, HSAs, FSAs, and other subcategories in the alphabet soup of healthcare reimbursement accounts have different sets of characteristics – some overlapping, while others very distinct. In this article, we will take a deep dive into the employer-funded Health Reimbursement Account (HRA) and examine its key benefits for both employers and employees alike.
- What is a Health Reimbursement Account (HRA)?
- How Does a Health Reimbursement Account Work?
- Eligible Expenses for HRA Coverage
- The Tax Implications of a Health Reimbursement Account
- What is the Difference Between HRAs and HSAs?
- The Benefits of a Health Reimbursement Account
- The Drawbacks of a Health Reimbursement Account
- Should Your Company Offer a Health Reimbursement Account?
What is a Health Reimbursement Account?
A Health Reimbursement Account (HRA) is an employer-funded and employer-owned health benefit account that employees can use to get reimbursed for qualified medical expenses. These arrangements give employees flexibility and tax benefits while offering a safety net for unexpected medical expenses.
Tax Benefits
One of the key advantages of an HRA is that the funds deposited into the account are tax-free for both the employee and the employer. Some employers prefer using HRAs because the funds they contribute to an HRA can be deducted from the company’s taxes. Meanwhile, these funds received by the employee are not taxable.
Covered Medical Expenses
An HRA is designed to cover medical expenses. These include deductibles, copays, coinsurance payments, and expenses not covered by insurance, such as vision and dental care. The employer determines which expenses are eligible for reimbursement and sets the annual contribution limits to be reimbursed.
With an HRA, employees can decide how their healthcare dollars are spent. Employees can choose healthcare providers they prefer and treatments that best suit their needs without worrying about whether or not they are covered under their insurance plan.
Rollover of Funds
The funds in an HRA roll over annually. Funds not used by an employee in one year can be carried over to the following year. The main caveat is that because HRAs are employer-owned, employees lose access to these funds when they leave their employment.
How Does a Health Reimbursement Account Work?
To participate in an HRA, an employee must be enrolled in a high-deductible health plan (HDHP). This type of insurance plan typically carries a lower monthly premium, but has high out-of-pocket costs. Once enrolled, the employee can use their HRA funds to pay for qualified medical expenses until they reach their deductible. After that, their HDHP coverage kicks in.
HRAs are funded exclusively by employers and are not considered taxable employee benefits. Employers will determine contribution amounts and tailor their plans to meet the unique needs of their workforce.
It’s important to note that HRAs are subject to certain IRS regulations. Employers must comply with specific rules to avoid penalties. Nevertheless, HRAs are an excellent way for employers to provide comprehensive health benefits to their employees while managing costs and minimizing tax liabilities.
Eligible Expenses for HRA Coverage
Eligible healthcare expenses include medical and dental expenses, deductibles, co-payments, prescription medications, and certain treatments, such as acupuncture, chiropractic care, and physical therapy.
Some expenses may not be eligible for reimbursement through an HRA. These include cosmetic procedures, over-the-counter medications, and non-prescription medical equipment. Any expenses already covered by an individual’s health insurance plan cannot be reimbursed through an HRA.
The list of eligible healthcare expenses can vary depending on the type of HRA the employer offers. Therefore, employees should always review the specific rules regarding their HRAs provided by their employers to ensure they are not submitting ineligible expenses for reimbursement.
An HRA is a valuable benefit option to help employees manage their healthcare costs. By understanding what types of expenses are eligible for coverage, employees can maximize the benefits of their HRA and ensure they are getting the most out of their healthcare benefits.
Tax Implications of a Health Reimbursement Account
One of the key benefits of an HRA is that it is tax-free. The contributions made by the employer do not count as taxable income for the employee. As such, employees do not have to pay income tax on the contributions, leading to substantial tax savings.
Subsequently, any funds that are reimbursed to the employee from the HRA are also tax-free. As long as the expenses are qualified medical expenses, employees do not have to report them as taxable income.
Notably, HRA contributions are also not subject to Social Security and Medicare taxes. The employee and employer can save on payroll taxes.
In general, HRAs are considered to be group health plans under the Affordable Care Act (ACA). This is to comply with the ACA market reforms. An HRA must be “integrated” with other coverage as part of a group health plan that alone complies with the market reforms.
What is the Difference Between HRAs and HSAs?
Health Reimbursement Accounts (HRA) and Health Savings Accounts (HSA) are great options to help employees offset eligible health-care expenses. However, there are key differences between them:
Who Owns the Account
HRAs are owned by the employer who set up the plan, whereas HSAs are owned by the employee. Because of this, HSA funds stay with employees when they leave a job, whereas HRA funds do not. HSA funds can be used from job to job and in retirement. The money stays in the account until the employee chooses to use it. After age 65, the money withdrawn is only subject to income tax (vs. income tax plus a penalty tax before reaching that threshold).
Who Can Contribute
HRAs are employer-sponsored and can only be opened by an employer. On the other hand, HSAs can be opened by individuals, family members, or their employer.
Other Considerations
HSAs can accumulate interest on deposited funds, whereas HRAs do not. When it comes to using the funds, HRAs are generally more restrictive. They can only reimburse medical expenses your employer has agreed to cover. In contrast, HSAs can be used for a wider range of medical expenses, like vision and dental. Furthermore, some HSAs allow users to invest their contributions in mutual funds, a flexible spending account, stocks, and other investment vehicles.
HRAs and HSAs offer advantages and disadvantages, depending on individual circumstances. Speaking with a financial advisor to weigh both options’ pros and cons and determine the best choice for your healthcare needs is greatly advisable.
The Benefits of a Health Reimbursement Account
One of the major advantages of an HRA is that it gives employees greater control over their healthcare spending. Unlike traditional insurance plans that may limit the coverage options available to employees, an HRA allows them to choose the specific medical services and products that best meet their needs.
Employees can use their HRA funds to pay for the medical expenses that matter most to them, whether a routine doctor visit or more specialized treatment.
Summary of Benefits:
- Cost Savings: when set up with the right insurance plan, HRAs reduce the overall healthcare costs for both employers and employees.
- Flexibility: HRAs can be designed to meet an organization’s or individual employee’s specific needs. They can be customized to cover certain healthcare expenses, such as deductibles, prescriptions, and copays.
- Tax Benefits: HRAs are tax-free for both the employer and employee.
- Employee Retention: offering HRAs to employees can help retain employees as it is a valuable incentive that shows that the employer cares about the well-being of their workforce.
Overall, the advantages of a Health Reimbursement Accounts are numerous. From greater flexibility and control over healthcare spending to tax advantages and cost savings, an HRA can be a valuable benefit for both employers and employees alike.
Drawbacks of a Health Reimbursement Account
While HRAs have many advantages, such as flexibility and tax benefits, there are also some disadvantages that employers and employees should be aware of:
Administering the account
Unlike traditional health insurance plans with fixed coverage amounts and deductibles, HRAs require employers to set up and manage a fund that reimburses employees for their medical expenses up to a certain amount. This can be challenging for employers who may lack the necessary expertise to manage the plan or employees who need to keep track of receipts and other paperwork to submit their claims.
Sufficiency of coverage
There may not be sufficient coverage for all medical expenses. While HRAs can be used to pay for many medical expenses, such as doctor visits, prescription drugs, and lab tests, they may not cover other treatments, such as alternative medicine or cosmetic procedures. This can be a problem for employees who require specialized medical care not covered by their HRA.
Insufficient coverage for high medical expenses
HRAs may not adequately protect employees with high medical expenses. Unlike traditional insurance plans with annual limits on out-of-pocket expenses, HRAs may not have such limits, which means that employees with high medical expenses may pay a significant amount out of pocket. This presents a considerable disadvantage for employees with chronic health conditions or requiring expensive medical treatments.
Should Your Company Offer a Health Reimbursement Account?
It’s clear that offering health benefits to employees is a must for companies looking to stay competitive in a rapidly evolving landscape. Health and wellness benefits not only show employees that a company cares about the well-being of its workforce. They also reduce overall healthcare costs, lower absenteeism, and increase productivity.
In this regard, HRAs can benefit employers looking to provide their employees with cost-effective healthcare while employees can be reimbursed for eligible medical expenses not covered under their primary health insurance – tax free for both parties.
The specific type of health reimbursement account will depend on your company’s budget and needs that are specific to your organization and your staff.