Health Reimbursement Arrangement (HRA)

Definition

A Health Reimbursement Arrangement (HRA) is an employer-funded plan that reimburses employees for out-of-pocket medical expenses and, in some cases, insurance premiums. This compensation is tax-free, adding to its financial appeal. The employer sets the guidelines for the reimbursement, which usually does not include over-the-counter medications, except when prescribed by a doctor.

Phonetic

Health – /hɛlθ/Reimbursement – /ˌriːɪmˈbɜːrsmənt/Arrangement – /əˈreɪndʒmənt/HRA – /ˌeichˈɑːrˈeɪ/

Key Takeaways

1. Employer-sponsored Plan: Health Reimbursement Arrangements (HRAs) are employer-sponsored plans that reimburse employees for out-of-pocket medical expenses and individual health insurance premiums.
2. Tax Advantages: Any reimbursements received through an HRA are generally tax-free. Employers can also deduct the money they put into the HRA as a business expense. This provides a tax advantage to both employees and employers.
3. Flexibility and Control for Employers: HRAs offer great flexibility for employers. They can decide what expenses to reimburse and how much money to put into the HRA each year. However, once a plan year begins, these terms cannot be changed.

Importance

A Health Reimbursement Arrangement (HRA) is important because it is a healthcare plan that allows employers to reimburse employees for out-of-pocket medical expenses and individual health insurance premiums. It’s a significant aspect of employee benefits because it is funded solely by the employer, implying that all contributions are tax-deductible for the employer and tax-free for the employee. This allows businesses to offer better health care benefits while still controlling costs, and gives employees the flexibility to use the fund for a wide array of medical costs. Ultimately, it facilitates access to health care and reduces the financial burden of medical costs on employees.

Explanation

A Health Reimbursement Arrangement (HRA) is a tool designed to assist in alleviating health-related expenses for employees, while giving employers a tax-advantageous opportunity to enhance their benefits package. The primary purpose of an HRA is to compensate the employees for their out-of-pocket medical costs. This arrangement is fully funded by the employers where they reimburse the employees for the healthcare expenses incurred by them or their family members.HRAs are used to offer employees an effective way to pay for a range of medical expenses that otherwise, they might struggle to afford. This includes expenses like copayments, deductibles, and services not covered by insurance. With an HRA, employers can make a specific amount of money available to each employee for healthcare costs each year, and the money is only transferred if and when the employee incurs these costs, protecting the employer from over-spending. This helps employees to manage their own health costs more effectively and gives them more flexibility and security in their healthcare decisions.

Examples

1. Small Business Scenario: A small business owner decides to offer a Health Reimbursement Arrangement (HRA) to her employees instead of a traditional healthcare plan. This is a cost-effective approach for her because she can’t afford the high premiums of conventional group health insurance. With the HRA, she funds an account for each employee and they are reimbursed for their medical expenses, up to a specified limit, helping them to afford out-of-pocket medical costs and insurance premiums. 2. Retail Industry Scenario: A large retail corporation with many part-time and seasonal workers implements an HRA to not only provide some level of health benefits to their workforce, but also control costs. By defining the reimbursable expenses and the maximum limit, the company can ensure they’re providing a valuable benefit without committing beyond their financial capacity. 3. Non-profit Organization Scenario: A non-profit organization wants to attract and retain high-quality employees but has a limited budget due to the reliance on grants and donations. By offering an HRA, the non-profit provides a valuable employee benefit without a significant financial burden. With the HRA, employees can be reimbursed for certain health insurance costs, thus giving them a perk that’s both beneficial and tax-efficient.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Healthcare Deductibles
• Pre-Tax Contributions
• Medical Expenses
• Employer-Funded Health Benefits
• Flexible Spending Account (FSA)

Sources for More Information

• HealthCare.gov
• Investopedia
• Optum
• Robinhood