What Is A Health Reimbursement Arrangement (HRA)?

When you start a new job, your employer will likely give you some papers containing your explanation of benefits, and these can be daunting.

It often seems like the insurance companies are using a language made up of acronyms, and somehow you have to understand it and choose the best option for you and your family.

In this article, we will discuss Health Reimbursement Arrangements to help you understand what your employer is offering. That way, you can make a more informed decision about your health care plan.

What Is a Health Reimbursement Arrangement?

A Health Reimbursement Account, also called an HRA, is a certain amount of money that your employer sets aside for you to use for approved medical expenses that would go towards your deductible.

Companies often offer this benefit to help offset increased deductibles for their employees.

How Does an HRA Work?

Employers will put a certain amount of money into an account for their employees to use for eligible medical expenses. This means the employer owns the account and that they and the IRS set the rules for using it.

Depending on the type of HRA a company has set up, they’ll either require the employee to pay a certain amount of the deductible before the HRA kicks in or pay up to a certain point before the employee has to begin paying the expenses from their own pocket. They also may have a plan to split the costs as you go.

You can sign up for an HRA when you choose your other insurance packages, which is typically either when you first join the company or during an annual open enrollment period. Companies usually pair HRAs with plans that have high deductibles since they’re intended to help you cover your deductible.

Depending on your employer’s plan, you may receive a card that you can use to pay for your medical expenses as they come up. Some companies will reimburse you after you pay, while others will allow you to have the HRA pay your healthcare provider directly.

Often, companies will allow any unused HRA funds to roll over into the next year, or at least into a few months of the next year, but some do not. Similarly, you can apply the funds to your dependents’ medical bills with some HRAs, but not with others.

Make sure you take the time to ask your HR representative how the company’s program works when you sign up for this benefit so that you know what to expect and how to handle future bills.

Benefits of an HRA

If you see that your employer offers an HRA, there are a few reasons why you may want to take advantage of it:

1. It isn’t taxed. The money your employer puts into your HRA account doesn’t go toward your income tax. This means that you’ll save the money you would’ve spent on your medical expenses as well as the tax you would’ve paid when you made that money in the first place.

2. An HRA can help you pay for the medical expenses your insurance doesn’t cover. This can include many prescription medications, supplies like crutches and wheelchairs, mental health care, transportation, and other expenses such as food and beverages that you incur while undergoing medical treatment.

HRA Examples

There are many different ways companies can set up their HRAs, but here are a few examples of some of the most common ones:

1. Employee Pays First

   Say that you have a health plan with a $5,000 deductible and an HRA.

   If your plan is set up so that the employee pays first, you would have to pay $2,500 of your deductible, and then your employer will pay the second $2,500 from your HRA.

   Other plans won’t split the deductible into half and may require you to pay the first $3,000, for instance, and then your HRA will cover the remaining $2,000. This rate will change depending on the plan your employer sets up.

2. Employer Pays First

   A second common design for an HRA plan is basically the reverse of the previous one.

   With this plan, if your deductible is $8,000 and your employer sets up your HRA to cover half of it, your employer will pay the first $4,000, so you won’t have to pay for anything until your bills exceed $4,000 total.

   It’s common for employers to implement this type of plan when they’re trying to make a health care plan with a higher deductible more palatable to employees.

3. Split Deductible

   With this plan design, your employer will split every cost with you until you reach your deductible.

   For example, if you have a $6,000 deductible and went to a doctor’s appointment that cost you $150, your HRA would cover $75 of it and you the remaining $75. This would continue until you meet your $6,000 deductible, which means you would pay a total of $3,000.

   Some plans may not be 50/50, though. If your employer only pays 30% of the cost, for example, you’d pay $105 for your doctor’s appointment, and your HRA would cover $45. This also means that with a $6,000 deductible, in the long run, you’d end up paying $4,200, and your employer would cover $1,800.

   On the other hand, your employer may cover 75% of the costs, leaving you to only pay for 25%. Because there are so many ways to structure these types of plans, remember to pay attention to these rates when you are choosing an HRA plan that splits the deductible.

4. Divided Deductible

   This is a more complicated design for an HRA plan, but it can be beneficial, especially if you don’t tend to meet your whole deductible.

   With this setup, if you have a $7,000 deductible, you would be responsible for paying the first $1,750, your HRA would cover the next $3,500, and you’d pay the final $1,750.

   Often, if a company uses this design when implementing a health plan with a high deductible, the first amount you pay will be similar to your old deductible. This makes for an easier transition to the high deductible plan.

The Differences Between an HRA, an HSA, and an FSA

Along with HRAs, you may see HSAs and FSAs listed on your explanation of benefits.

Health Savings Accounts, or HSAs, are accounts where you as the employee can set aside money that you can later use for various medical expenses. Your company will pull this money out of your paycheck for you so that you don’t have to pay income taxes on the amount you set aside.

The factor that makes HSAs unique is that your employer doesn’t contribute anything to this account.

On the other hand, both you and your employer can contribute to a Flexible Spending Account or FSA. You can also often use FSAs to pay for a wider variety of expenses, including some over-the-counter medical items.

Meanwhile, HRAs don’t allow the employee to contribute to the account, and there is a set list of approved expenses you can use them to pay for.

Learning Resources for HRAs

Since everyone could use a little help navigating the world of insurance now and then, here are some places you can go to learn more about HRAs:

1. Your insurance provider. Start your search by checking out your insurance provider’s website. Often they’ll have helpful articles, FAQs, and other details about the HRA and insurance plans they offer.

   Some providers also have mobile apps and other tools that allow you to quickly check if an expense is covered or not.

2. Your company’s human resources department. If you have specific questions about your HRA, your HR department is the best place to go. They can tell you about the particular requirements of the insurance provider and those of the company.

   If your company is large enough, it might also have information available on its website, so look for that too.

3. The IRS’s list of eligible expenses. To find out about what you can pay for with your HRA and what you can’t, check out IRS Publication 502. It has an alphabetized list of types of medical expenses that an HRA will cover.

   This list also includes indirect expenses such as a service dog or modifications you need to make to your home due to a disability.

Who Can Offer an HRA?

If you’re an employer considering offering an HRA to your staff, the good news is that the only qualification to do so is having at least one employee on your payroll. That employee, however, can’t be you, so if you’re self-employed, you won’t be able to qualify for an HRA plan.

In order to offer an HRA at your company, you’ll need to fill out the appropriate paperwork to make sure your organization is being compliant with the standards set in place by the IRS, ERIS, HIPAA, and the Affordable Care Act.

Many companies choose to have a third party manage all this for them when they plan to offer an HRA, just as they do with other forms of insurance.

Author

Abby McCain

Abby is a writer who is passionate about the power of story. Whether it’s communicating complicated topics in a clear way or helping readers connect with another person or place from the comfort of their couch. Abby attended Oral Roberts University in Tulsa, Oklahoma, where she earned a degree in writing with concentrations in journalism and business.