Employees often depend on their employers for benefits packages that fit their lifestyle needs and those of their families. An HRA, or Health Reimbursement Arrangement, might be the perfect solution to saving money on employer-sponsored healthcare and providing employees the healthcare flexibility they need.
How Health Reimbursement Arrangements Work
An HRA is a healthcare expense allotment to employees that is solely funded by an employer. HRAs are unfunded accounts, meaning the funds are not directly available to the employee. Reimbursements are made from the employer’s general assets once an eligible expense is submitted. All contributions are tax deductible for the employer and tax-free to the employee.
As an employer, you can tailor an HRA agreement to fit your needs. Flexible HRA plans allow you to determine most of the details. Basic plan components to consider are:
- How much and how often contributions are made. The employer sets the annual limit on HRA contributions for enrolled employees.
- Eligibility requirements. Often, employers require employees to be enrolled in their provided healthcare plan.
- Eligible expenses. The Internal Revenue Service (IRS) defines potential eligible expenses to include any medical related costs. This refers to co-payments, co-insurance, deductibles, and dental, vision, holistic, and other medical related appointments. The employer identifies what expenses are acceptable in accordance with Internal Revenue Code (IRC) and communicates clearly to enrolled employees. Some employers honor all IRS 213(d) qualified expenses, while some include only the expenses covered under their healthcare plan that are members’ responsibility (such as deductibles and copays).
- Rollover and retirement usage. Some plans must be used by the end of the employee’s health plan year, while others roll over annually. Employers can also allow retired employees access to their HRA.
It’s your duty as an employer to ensure the following:
- Your HRA complies with the Internal Revenue Code (IRC) and state and local laws.
- Filing documentation with government agencies such as the Department of Labor and the IRS.
- Distributing plan descriptions and materials to HRA participants.
Benefits of HRAs
HRAs can help both you and your employees save on healthcare costs. Because the employer has the freedom to tailor their HRA, a well-designed plan can yield significant savings for both parties.
Employer benefits include:
- Contributions are 100 percent tax deductible.
- When structured properly, an employer can cut healthcare costs without reducing healthcare benefits to employees. For example, when paired with a high deductible healthcare plan, an HRA makes up the higher out-of-pocket costs for the employee yet benefits the employer by allowing some of their healthcare costs to be tax deductible.
- Employers can control costs by determining which medical expenses are eligible.
- Because not all employees use their healthcare coverage, an HRA allows the employer to take back unused funds.
- Employers can use HRAs as an alternative to retiree healthcare.
- Having a benefit like an HRA plan may attract a greater range of talent when recruiting employees.
Employees can also benefit from an HRA agreement. Benefits include:
- Depending on the design of the HRA plan, employees are reimbursed for out-of-pocket costs such as co-pays, deductibles, prescriptions, co-insurance, vision, dental, holistic, and other health expenses.
- In the case of a high deductible health plan, an HRA may substitute some of the deductible and premium cost.
- Employees don’t have to claim an income tax deduction on HRA covered costs.