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What is a Health Reimbursement Arrangement (HRA)?

A Health Reimbursement Arrangement (HRA) is a tax-advantaged benefit under Section 105 of the IRS code that allows both employees and employers to save on the cost of healthcare. An HRA is funded solely by the employer for the purpose of reimbursing employees for allowable medical expenses.

Under an HRA plan, the employer funds individual reimbursement accounts for their employees. The employer can defines the schedule of account funding as well as what those funds can be used for – i.e., specified out-of-pocket expenses such as deductibles and co-pays. HRA contributions and administrative costs are tax deductible to the employer and reimbursements made to the employee are received tax-free. 

Benefits to the Employer

HRAs are becoming increasingly popular as a means to control the rising cost of health care premiums. HRAs are one of the most flexible types of employee benefits plans and may be designed in many fashions to suit the specific needs of employer and employees alike.

HRAs can be independent of a High Deductible Health Plan (HDHP). However, an employer’s savings may be maximized by partnering an HRA with an HDHP.  HRAs allow an employer to realize substantial savings by migrating from first dollar coverage to a High Deductible Health Plan (HDHP) option without having to increase their employees’ out-of-pocket exposure. Employers can purchase high deductible health plan that allows them to save a significant amount in premium savings. Then the employer can add and HRA to self-fund all or a portion of the increased plan deductible in an account for the employees'  making the change cost-neutral or possibly providing a savings to the benefits budget. Many employers use the premium dollars saved from a benefits downgrade to fund the employees’ account 

Under an HRA plan, employers may establish what expenses the funds may be used for; from as comprehensive as all health-related eligible expenses to as limited as emergency room expenses only. The employer can also determine if the HRA funds can be rolled from year to year and how much rolls over (which can be either a flat amount or a percentage).  At the employer's discretion, the HRA may be offered alongside an FSA, providing considerable pre-tax savings to employees.

Because they are very flexible, HRA plans enable employers to control costs of providing healthcare benefits while providing a valuable employee benefit By selecting a higher deductible health plan, and purchasing an HRA, the employer can create savings in their health programs by implementing a plan employees enjoy using, and also help the company control costs effectively.