What is a Health Reimbursement Arrangement (HRA)?

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Definition:

A health reimbursement arrangement (HRA) is a type of employer-sponsored health benefit where the employer reimburses employees for the medical expenses he or she incurs.

🤔 Understanding HRAs

A health reimbursement arrangement (aka HRA or health reimbursement account) is not a health insurance plan, but rather an added benefit that employers might offer to employees to supplement a health insurance plan or instead of employer-sponsored health insurance. With an HRA, employees incur medical costs, and then their employers reimburse up to a particular dollar amount. HRAs offer tax-advantaged reimbursements, meaning the money employees receive from their employers does not count as income and is not subject to taxes. Depending on the type of HRA, employers may be able to roll money over from one year to the next. HRA benefits can reimburse employees for expenses including health premiums, deductibles, and copayments.

Example

Let’s say you’ve recently started a new job at a local small business. Because of the size of the business, the owner can’t afford to provide health insurance to the employees. But he still wants to help cover some of your medical costs. You find health insurance coverage on the health insurance marketplace (the government-operated marketplace created by the Affordable Care Act). Then your employer sets up a health reimbursement arrangement (HRA) where he’ll set aside a particular amount of money each year to help you and your colleagues pay for your insurance premiums and other out-of-pocket costs.

Takeaway

A health reimbursement arrangement is like the weekly allowance your parents gave you as a kid…

Think back to your childhood when there was a pricey toy you asked your parents to buy — maybe a video game system. Your parents can’t swing the cost of the entire game system, but give you a weekly allowance to help supplement the cost when you’re finally ready to buy. A health reimbursement arrangement is similar to that weekly allowance — Your employer sets aside a particular amount of money for you each year to help supplement the cost of your out-of-pocket medical expenses.

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What is a health reimbursement arrangement (HRA)?

A health reimbursement arrangement (HRA) is a benefit that employers can offer to employees to help cover the cost of out-of-pocket medical expenses. When an employer offers an HRA, it can reimburse employees for qualified medical expenses as defined by the Internal Revenue Service (IRS).

Employers can choose whether to offer an HRA, how much to contribute for each employee, and whether to roll funds over from one year to the next. Only employers can contribute to an HRA — Employees may not contribute. The cost of an HRA is tax deductible for the employer, and the reimbursements to employees do not count as income and are not subject to taxes.

Suppose your employer chose to offer an HRA in addition to a high-deductible health plan (HDHP). With a HDHP, employees end up paying a lot upfront before their insurance fully kicks in. With an HRA, your employer could reimburse you for some or all of those costs to help remove some of the cost burden from you and your colleagues.

How does an HRA work?

Though there are several different types of health reimbursement arrangements (HRAs), and they might look different from one employer to the next, they each follow the same basic steps.

  1. Companies choose a particular amount of money that they’ll offer to each employee for reimbursement.
  2. Employees incur out-of-pocket health expenses such as premiums, deductibles, copayments, and more.
  3. Employees file the necessary paperwork with the company to request reimbursement for their expenses.
  4. If the expenses are eligible for reimbursement under an HRA, then the company reimburses the employee up to the allowed per-employee amount.

Instead of reimbursements, employers can also choose to provide employees with a debit card they can use to cover the cost of medical expenses. For the money to be tax-free for employees and tax-deductible for employers, all expenses still must be qualified medical expenses.

What does an HRA cover?

Health reimbursement arrangements (HRAs) can cover any qualified medical expenses as defined by the Internal Revenue Service (IRS). The list of qualified medical expenses is substantial and includes any costs related to the diagnosis, cure, prevention, and treatment of diseases. Qualified medical expenses also include the cost of transportation to get to and from medical treatment centers. HRAs may even cover the cost of insurance premiums.

What happens to unused HRA funds?

Each health reimbursement arrangement (HRA) looks a bit different, as employers are able to customize so many of the features. When it comes to unused funds, employers have the option of carrying over some or all of the funds. Employers can also choose not to allow for carryover. But at the end of the year employers can’t choose to refund any excess money to employees. The money can only ever go to qualified medical expenses.

What are the HRA rules for employers?

One of the benefits of health reimbursement arrangements (HRAs) is that they’re very customizable for employers. Employers get to decide whether to offer an HRA, how much money to offer employees, and whether the money can roll over from one year to the next.

There are a few rules, though. First, employers cannot accept employee contributions into an HRA, including through employee salary deferrals. Additionally, for the expenses to be deductible for the employer, they can only be used to reimburse qualified medical expenses.

What is the difference between a QSEHRA, group coverage HRA, and retiree HRA?

There are different types of health reimbursement arrangements that employers might offer to their employees:

  • A Qualified Small Employer HRA (QSEHRA) is a type of HRA available to small businesses that don’t offer traditional health insurance. Employees may use these reimbursements to cover the cost of premiums for health insurance they buy elsewhere.
  • A group coverage HRA is a plan that employers pair with a high-deductible health plan to help employees supplement the higher deductible costs.
  • A retiree HRA is one that employers can offer to help their retired former employees pay for out-of-pocket healthcare costs during retirement.

Which HRAs are available in 2020?

In addition to the other types of health reimbursement arrangements, there are two plans that are new for 2020:

  • An individual coverage HRA is one that employers can use instead of offering a traditional health insurance plan. This option was previously only available to small businesses that weren’t subject to the mandate requiring companies to provide health insurance to employees.
  • An excepted-benefits HRA covers medical expenses not necessarily covered in other types of health plans. These expenses include vision and dental coverage.

What is the difference between a health savings account and an HRA?

Under a health reimbursement arrangement (HRA), an employer may choose to reimburse employees for some of their out-of-pocket healthcare costs. Only the employer may contribute funds to the HRA, and employees cannot enroll in an outside HRA.

A health savings account (HSA) is a type of savings mechanism where employees with a high-deductible health plan (HDHP) through their employers may set aside money in a tax-advantaged account to pay for medical expenses. Only employees with an HDHP can enroll in an HSA, but they don’t have to get the plan through their employers — They can also enroll in an outside plan. Unlike an HRA, both the employer and employee may contribute to an employee’s HSA.

Who qualifies for an HRA?

A health reimbursement arrangement (HRA) is an employer-sponsored health benefit that allows employers to reimburse employees for some of their out-of-pocket healthcare costs. You may only use an HRA if your employer chooses to offer one. If your employer offers an HRA, then you qualify to seek reimbursement for medical expenses for you, your spouse, and your dependents.

Should I use an HRA administrator?

If you are an employer planning to offer a health reimbursement arrangement (HRA), you’ll need someone to administer the program. The good news is that someone within your company can act as the administrator, as long as you have the necessary HRA plan documents in place.

Though someone within your company can administer the arrangement, many companies choose a third-party company to handle their HRAs to make sure they are compliant with federal law. First, you have the option of hiring a traditional third-party administrator, which is another company that will handle the documentation and claims for your HRA. You can also choose to purchase HRA software, which you can use to help with your HRA administration.

What are the pros and cons of HRAs?

Health reimbursement arrangements (HRAs) can be a great way to remove some of the cost burden of healthcare from employees. But as with most things, there are downsides as well.

Advantages:

  • HRA reimbursements don’t count as income, meaning the employee doesn’t have to pay income and payroll taxes on those funds.
  • HRAs allow small businesses that can’t afford the cost of traditional health coverage to help reduce the cost burden for employees.

Disadvantages:

  • Employers can choose to offer an HRA instead of traditional health insurance, which might be more expensive for employees.
  • Employers can choose not to roll over the funds, which may be disadvantageous to employees.

Is an HRA the right choice for me?

If your employer chooses to offer a health reimbursement arrangement (HRA), then it can be a great way to reduce your out-of-pocket medical cost burden. Only those employees whose employers offer an HRA are able to use such a plan. But the good news is that it doesn’t cost you anything extra — Only employers can contribute to HRAs.

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