What Are Health Reimbursement Arrangements (HRAs)?

Understanding all of your health care benefits is often difficult, as the options available to you may vary each year as you change employers, your family grows in size or you experience other life events. Amid all this flux, it's easy to miss out on lesser-known but valuable benefits such as health reimbursement arrangements (HRAs). To help you determine if an HRA might be a worthwhile option for you and your family, we've outlined the basics of HRAs and compared them to health savings arrangements (HSAs).

If you're interested in learning about HSAs first, check out our article here.

What is an HRA?

An HRA is a tax-advantaged health care benefit offered by some employers that allows employees to be reimbursed for qualified medical expenses and — in some cases — health insurance premiums. HRAs are often used by companies that don't otherwise provide health insurance to employees. They may also be offered as an additional benefit that allows employees to supplement existing coverage.

Here's how HRAs most commonly work: You submit health care receipts to your employer for proof of payment and then get reimbursed for qualified medical expenses. What constitutes a “qualified” expense is left to the discretion of your employer but may include anything from chiropractic services and contact lenses to doctor visits and dental treatments. Nonessentials like nutritional supplements and cosmetic surgeries usually do not qualify.

To learn more about what generally qualifies as a medical expense under HRA rules, check out this IRS page, under the header “What are medical expenses?” And keep in mind that employers can also set their own limits on qualified expenses.

HRAs often include a monthly or yearly cap, which is set at the discretion of the employer and based on the type of HRA that is offered. Similarly, the funds may not roll over monthly or yearly. Because your employer is the sole contributor to the account, if you leave the company, you will lose the HRA and any funds associated with it.

What are the benefits and risks of an HRA?

Benefits:

• HRAs are tax-advantaged, meaning the funds you receive from your employer to cover expenses won't be taxed, which can help save you money on out-of-pocket medical expenses that are allowed by your employer.
• At the discretion of your employer, HRAs may provide the opportunity to roll over unused funds at the end of a coverage period.

Risks:

• HRAs are not portable, meaning if you are terminated or take a new job, you generally lose the benefits of the HRA or leave behind any unspent funds contributed by your employer.
• HRAs can also be difficult to utilize to their full potential if your employer is particularly strict about which costs will be reimbursed or how quickly you must use funds. For example, if you have a low cap on the HRA amount and no rollover, you're likely to lose some of the benefits. An employer can also pare down the qualified expenses, so not everything included in the IRS list may be eligible for reimbursement under your particular plan.

How do HRAs compare to HSAs?

While HRAs are rising in popularity, HSAs are still more common and their benefits are better understood. According to the Bureau of Labor Statistics, access to HSAs for private industry workers jumped from 14% in 2010 to 30% in 2019.

While there are certain scenarios where only an HSA or an HRA is available to you, you might be given the opportunity to choose between them or opt in for both. If that's the case, here are a few key points of comparison:

• Portability: Because an HSA is not tied to an employer, it stays active even if you change or lose your job. An HRA does not.
• Health insurance flexibility: HRAs win flexibility points over HSAs when it comes to health insurance. An HSA is only an option if you have a high deductible health plan (HDHP). HRAs, on the other hand, are not necessarily plan-dependent.
• Tax advantages: Both plans offer certain tax benefits. Mainly, they are funded with pre-tax dollars. With an HRA, this is more important for the employer because they are the sole contributor. With an HSA, this is very useful for any party that contributes to the account.
• Retirement savings: Because an HSA is portable and your unspent funds roll over indefinitely, your savings can accumulate for longer stretches of your lifetime. Depending on how you invest the funds, the value of an HSA can grow significantly over time and can be used during retirement to pay for qualified medical expenses.

As HRAs become increasingly common, you are more and more likely to cross paths with an employer that offers them as a health care benefit. Having a general understanding of how HRAs work will allow you to have a more specific and nuanced conversation with your employer about the range of benefits being offered to you.