A Health Reimbursement Arrangement (HRA) is an employer-funded health benefit account that reimburses employees for out-of-pocket medical expenses – and in some cases for insurance premiums. HRAs are becoming increasingly common as more employers are seeking alternatives to traditional health benefits.
For employers, there are many advantages to offering HRAs, including cost control, tax benefits, risk mitigation, and the flexibility to design a plan that fits their company. But what about employees? Are HRAs as beneficial for workers as they are for businesses?
Whether you’re a business owner or worker, you’ll be happy to know that HRAs are a win-win situation for both employer and employee. Below, our experts explain the four main advantages of HRAs for employees.
HRAs Provide Tax-Free Reimbursement
It’s important to acknowledge that unlike a health savings account (HSA), an HRA is not an employee-accessible account – employees can’t withdraw funds and use them to cover healthcare expenses. Instead, they pay out of pocket for healthcare costs and then request reimbursement for qualifying expenses up to a predetermined amount.
When an employee files a claim for a qualified medical expense, the reimbursement is 100% tax free. Because the reimbursements occur pre-tax, HRAs can help employees and employers save up to 50% in combined taxes on the cost of medical expenses!
HRAs Don't Affect Employees' Income
The amount an employer is willing to reimburse an employee for medical expenses through an HRA is not considered taxable income, as long as the employee puts the money toward qualified medical expenses.
This means as an employee, you don’t have to report your participation in an HRA on your tax return, because the contributions do not count toward your gross income. Basically, part of your job compensation is free healthcare!
HRAs Provide Personal Healthcare Freedom
When a business offers a traditional group insurance plan, it’s unlikely to meet all employees’ unique healthcare needs. With HRAs, individuals have greater choice in their healthcare services, with the ability to choose care that suits their lifestyle, preferences, and budget.
If you’re an employee and your employer is switching to an HRA, it means you will not only have the flexibility to find an individual health plan that fits you best, but also to be reimbursed for it! HRAs provide a truly customizable alternative to traditional group health insurance plans.
HRAs Offer Lower Healthcare Costs
Employees can use HRAs to be reimbursed for qualified medical expenses their health insurance doesn’t pay for, such as medical and pharmacy expenses they must pay out of pocket before meeting a deductible, as well as coinsurance that applies after meeting a deductible.
Since employees are using tax-free dollars to cover these and other qualified healthcare costs, participating in an HRA can help employees access their preferred healthcare at lower costs overall. Who doesn’t want and need more affordable healthcare?!
A few final notes on HRAs:
- An HRA is not health insurance. Instead, employers offer employees a monthly allowance of tax-free money to cover healthcare costs.
- HRAs have gone through a lot of regulatory changes since their introduction in the 1970s!
Check out our blog on the six types of HRAs.
- HRA-eligible expenses include, but may not be limited to: individual health insurance premiums, individual dental or vision premiums, amounts paid towards a policy’s deductible, copays, office visits, prescription drugs, nonprescription drugs with a doctor’s note, and mileage for eligible healthcare travel.
At Benafica, we believe HRAs are a game changer because they empower employees to be their own advocates when it comes to their healthcare. However, HRAs can vary significantly from one employer to the next in terms of how much coverage they offer and which expenses will be reimbursed, so it can be tricky to understand your coverage. Contact our experts today for free guidance about HRAs and other employee benefits!
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