The healthcare and health insurance industries are a messy alphabet soup in terms of coverages, premiums, and types of accounts. We’ve compared HSAs to FSAs in the past; many employers provide these accounts on a national basis.
However, there is another type of healthcare account that employers can provide that many people have not heard of called a Health Reimbursement Account or HRA. (The IRS also refers to this as a Health Reimbursement Arrangement).
It’s unfortunate that HRAs are not well known because they can be a win-win for both employees and employers. Here are some of the things you should know before you jump in to a HRA.
Important Health Reimbursement Account Information
If your company is looking for ways to lower costs while offering better coverage, a HRA can be a great option.
How Does a Health Reimbursement Account Work?
HRAs are accounts that can allow employers to provide lower healthcare costs to their employees while retaining control of the account. The funds are not available until an expense is incurred and employees usually cannot take the funds with them if they leave the employer.
The HRA covers out-of-pocket uncovered medical expenses and are often tied to high deductible health insurance. The employer might give an allowance of up to $250 per month to cover medical expenses that the employee would normally pay for out of pocket. Any expense above the amount available in the account would be paid by the employee.
Who Funds the Account?
Unlike Flexible Spending Accounts and Health Savings Accounts, Health Reimbursement Accounts are only funded by the employer. The other accounts can be funded by the employer or the employee. With an HRA the employee does not contribute to the account.
How Does an HRA Save Employers Money?
Why would an employer want to offer an account that only they can contribute to instead of letting the employee contribute as well? Wouldn’t letting employees help pay for their expenses in an HSA help save the employer money?
It’s all about the bottom line. HRAs can save employers a lot of money due to something called utilization.
Essentially if an employer offers a $250 per month benefit, across all employees the average benefit used might only be $125 per month. Since the funds aren’t paid until an expense has been incurred and thus needs to be reimbursed, the employer avoids spending the full $250 until it needs to. If the month only averages a spend of $125 per employee, the employer just avoided spending the other $125 and doesn’t have to pay out that money to anyone.
On the other hand if the employer were giving the employee $250 per month into an HSA to cover some of their costs that is money that isn’t returned. It goes to the employee every month and if they leave the company they can take the funds with them.
How Do HRAs Benefit Employees?
Again, it is all about the bottom line. Some employers that previously couldn’t afford to offer health insurance or might only be able to offer catastrophic coverage can significantly reduce their costs enough to open up options for full insurance to their employees.
Some HRA plans allow the employee to use the funds for their insurance premiums which can mean they end up with 100% coverage for zero up front cost. (They might have additional cost to add dependents or until they hit a deductible; it depends on how the employer has the plan set up.)
Additionally there are no caps on the amount that can be contributed like you run into with an HSA or FSA. In 2013, HSAs are capped at $3,250 per year in contributions for singles and $6,450 for families while FSAs are capped at $2,500 per year. An employer could provide a HRA benefit above those caps if it wanted to as there is no maximum contribution.
Are HRAs Tax-Deductible?
Since the employer is the one reimbursing the employee for an expense that has already happened and there are no employee contributions, there is no tax deduction for the employee. Employees aren’t having to set aside money out of their paychecks to cover their medical expenses; as soon as they occur they can be reimbursed.
However, for the employer the money spent on HRA reimbursements is just like any other business expense that can lower tax costs.