What is an HRA?
A health reimbursement arrangement (HRA) is a tax-advantaged funding vehicle that allows Americans to use employer-contributed funds for eligible out-of-pocket healthcare expenses not covered by insurance.
How does an HRA work?
Consumers enroll in an HRA as a part of a group health plan option through their employer. The employer contributes a predetermined amount for the plan year and decides how those funds will become available –immediately at the start of the plan year, incrementally throughout the year, or after the accompanying plan deductible has been met. Employers also determine what consumers can use HRA funds for, typically those expenses not covered by insurance, such as deductibles, co-insurance and prescriptions. Any unused HRA funds may be rolled over into the next year, if allowed by the employer. If consumers leave the company, however, they must forfeit unused HRA funds back to the employer.
What are the benefits of an HRA?
Healthcare costs in the U.S. continue to rise, with consumers shouldering more of the costs of their care. An HRA can help make a consumer’s predictable annual medical expenses more affordable by using employer-contributed pre-tax dollars to pay for them.
What can I use my HRA for?
Employers, along with guidance from the IRS, determine what consumers can use their HRA funds for. Typically, they allow them to be used on eligible out-of-pocket medical expenses not covered by their insurance, such as doctor’s office visits, treatments, labs and prescriptions. Sometimes an employer sets up an HRA to automatically pay for qualified expenses; other times, they issue a debit card for convenient consumer use.
HRA vs HSA
Both HRAs and HSAs are tax-advantaged savings vehicles that help pay for out-of-pocket medical expenses. However, the two accounts have many differences, as noted in the chart below.
Health Reimbursement Arrangement (HRA)
Health Savings Account (HSA)
|Employer owns the account||Consumer owns the account|
|Employer funds the account||Consumer funds the account (sometimes with assistance from their employer, known as employer seeding)|
|Employer determines when funds become available.||Funds become available as soon the consumer or employer contributes them. Most often, accounts are funded with pre-tax withholdings from a consumer paycheck|
|Employer determines what funds can be used for, which typically includes eligible out-of-pocket medical expenses not covered by insurance.||Consumer can use funds on any eligible out-of-pocket medical expenses not covered by insurance.|
|Employer receives any unused funds at the end of the year (if no rollover policy is in place) or when a consumer leaves the company.||Consumer owns his or her HSA funds for life. These funds can build up over time for long-term healthcare savings and for use in retirement. Consumer can withdraw funds at any time without penalty, as long as they are used on eligible items.|