Health Reimbursement Account (HRA)

What is a health reimbursement account (HRA)?

An HRA (health reimbursement account), is a type of group benefit offered by employers to their workers. This benefit is designed to help employees pay for eligible medical expenses, such as those that may not be covered by a standard health insurance plan. These expenses are determined by the employer and can vary depending on the specific HRA plan being offered.

One of the key differences between an HRA and other types of health insurance plans is that an HRA is financed and controlled by the employer. This means that the employer is responsible for funding the HRA and making decisions about how the plan is structured. Additionally, employers may offer year-end rollover options and a fixed cash amount for employees to use on eligible expenses each year.

When an employee begins working for a company, they will be informed of any HRA plans that are available and given the opportunity to enroll. It’s important to note that while an HRA is not health insurance, it can be a useful tool for employees to manage their medical expenses. HBR’s compensation research shows HRAs are gaining popularity as employers seek to provide healthcare benefits with more cost predictability than traditional health insurance, with individual coverage HRAs (ICHRAs) enabling defined-contribution health benefits for the first time.

On the other hand, an HSA (Health Savings Account) insurance plan is owned and funded by the employee, which means that if an employee with an HRA plan quits their job, any outstanding HRA balance belongs to the company. But an HSA plan can be taken by the employee when they change jobs.

Furthermore, HRA permits businesses to keep control over the design of health reimbursement account plans and fund rollover options, and it may be utilized as a retention strategy for employees. In simple words, it can be a benefit for both employer and employee. Employers can use it as a retention strategy and employees can use it as a tool for medical expenses.

What are the advantages of health reimbursement account (HRA) plans?

Health Reimbursement Accounts (HRA) offer a number of advantages for both employers and employees.

From an employer’s perspective, HRA plans allow them to design the plan and choose the fund rollover option, can be easily combined with an FSA, can be used as a way to retain employees, and offer tax-favored benefits.

For employees, the advantages of an HRA include the ability to save and accumulate funds, not needing to be enrolled in a high deductible health plan, being fully funded by the employer, and having immediate access to funds for eligible medical expenses.

How does an HRA work?

An HRA works as a reimbursement model rather than a direct spending account. Here’s how the process typically functions:

1. The employer sets up the HRA and defines eligible expenses.
2. Employee pays out-of-pocket for approved medical services.
3. Employee submits a claim with proper documentation, such as receipts or Explanation of Benefits (EOBs).
4. The employer reimburses the employee from the HRA fund.

What can an HRA cover?

• Expenses not covered by health plans like dental work, eye exams, and certain prescriptions.
  
• Health insurance premiums, especially for retirees or in Individual Coverage HRAs (ICHRAs).
  
• Services such as mental health counseling, fertility treatments, and medical equipment (depending on plan rules).
  

It’s important to note that HRAs are governed by specific IRS rules and must follow IRS-defined guidelines for qualifying expenses.

Difference between HSA and HRA

Both HRAs and HSAs help employees manage healthcare costs, but they differ in several key ways:

In contrast to an HSA, an HRA is more flexible in terms of pairing with insurance but offers less control to the employee. 

For businesses practicing employment at will, HRAs can be structured to remain cost-effective while offering employees attractive health benefits. SHRM’s total rewards guidance provides detailed guidance on HRA plan design, ERISA compliance, and integration with the ACA market to ensure employers maximize the flexibility of these arrangements while maintaining compliance.

HRA design strategy is core to competitive healthcare benefits while managing employer cost predictability. A structured hiring plan and strong talent acquisition practices help organizations attract and retain top talent.

Frequently asked questions