Health Reimbursement Account: Everything You Need to Know
A health reimbursement account is a great way to help manage the cost of healthcare while helping to return control of health spending to the patient.8 min read
2. You Can’t Take It with You
3. Approved Expenses
4. Plan Combinations
5. HRA Flexibility
6. Will It COBRA?
7. How to Use Your HRA
Health Reimbursement Account
A health reimbursement account is a great way to help manage the cost of health care while helping to return control of health spending to the patient. The HRA is a great innovation that’s been neglected by many. It pays to understand more about health reimbursement accounts, especially if they are offered as part of your employer’s benefit package.
The health reimbursement arrangement – also known as the HRA – is an IRS-sanctioned and employer-funded plan that uses pretax dollars to reimburse employee for approved health care expenses.
The HRA is not health insurance. Its benefits are strictly limited to whatever amount is paid into it. If your employer elects to fund your HRA to the tune of – say -- $3000 per year, you have $3000 to spend on approved medical expenses. That means the HRA can help defray medical costs but won’t cover the full expenses of emergency treatment or a serious chronic illness. It’s not intended to do that.
Rather, the HRA is intended to cover things insurance – specifically high-deductible insurance -- won’t. That means many over-the-counter medications, contraceptives, therapies not considered “medically necessary,” and a host of other wellness items that would otherwise need to be paid for out of the employee’s taxed income. In that way, it’s tremendously helpful.
The prime requirement of the HRA is that it must be paid by the employer, and not through a reduction of the employee’s paycheck. Another requirement: Funds must only be used for approved expenses.
In these ways, the HRA differs from and yet resembles the well-known FSA (flexible spending accounts). FSA’s also only apply to approved medical expenses. However, the FSA is funded out of employee deductions.
There are other rules that differ between HRA’s and FSA’s.
You Can’t Take It with You
Health Reimbursement Arrangements have some benefits that can help save on health care costs.
Premiums for the high-deductible health insurance plans offered with Health Reimbursement Arrangements are generally less per month than other plans.
Your employer funds your HRA with no deductions from your paycheck
Health Reimbursement Arrangement implies the reduced health insurance premiums associated with a High Deductible Health Plan.
Health Reimbursement Arrangement funds are given to employees pretax. Thus, the employees don’t pay taxes on the funds. Employees don’t need to claim an income tax deduction for any expenses reimbursed under the HRA.
The really good part: If the entire fund was not used during the calendar year, the balance usually rolls over to the following year.
But note that if you change employers or health plans, you can’t take your plan balance with you. That remains with your former employer or health plan. However, absent those major changes, the funds accrue from year-to-year.
The list of approved HRA expenses is long and considerable and covers a great deal of items for which many people dish out their post-tax earnings.
Here’s a partial list that should give you some notion of what constitutes a permissible HRA expense. Note that thanks to the flexible nature of HSA’s, employers are free to determine which expenses their plan covers, and which it doesn’t. That means this list is only an example and might not apply to your specific employment situation.
- Acne treatments (over-the-counter)
- Allergy and sinus medicine and products
- Allergy medication
- Allergy treatments and products
- Alternative dietary supplements (for treatment of a medical condition)
- Alternative drugs, medicines and treatment products (for treatment of a medical condition)
- Alternative healers (for treatment of a medical condition)
- Birth control (over-the-counter)
- Birth control (prescription or other)
- Blood pressure monitor
- Body scans
- Breast Pumps & Accessories
- Breast reconstruction surgery (following mastectomy)
- Breastfeeding classes
- Chiropractic care
- Co-insurance (dental)
- Co-insurance (medical)
- Co-insurance (prescription)
- Co-insurance (vision)
- Contraceptives (over-the-counter)
- Contraceptives (prescription)
- Cough drops and sore throat lozenges (over-the-counter)
- Cough syrup (over-the-counter)
- Counseling (for treatment of a medical condition)
- Counseling (marriage)
- Dancing lessons (for treatment of a medical condition)
- Deductible for dental plan
- Deductible for prescription plan
- Doula or birthing coach
- Drug addiction treatment
- Drugs (imported)
- Drugs and medicines (over-the-counter)
- Dyslexia treatment
- Face lifts
- Feminine hygiene products
- Flu shots
- Funeral expenses
- Medical records charges
- Medicare alternative insurance/plan premiums (paid with after-tax dollars only)
- Medicare alternative insurance/plan premiums (versus Part A & Part B, paid with after-tax dollars only)
- Medicare Part B insurance
- Medicare supplement policy premiums
- Mileage (for travel to/from anything other than eligible care)
- Mileage (for travel to/from eligible health care)
- Nasal sprays
- Nasal strips (over-the-counter)
- No show fees charged by health care provider
- Nonprescription drugs and medicines (for non-cosmetic purposes)
- Norplant insertion or removal
- Organ transplants (recipient and donor)
- Ortho keratotomy
- Smoking cessation (programs/counseling)
- Smoking cessation drugs (prescription)
- Varicose vein removal surgery (for medical care)
- Viagra and similar prescription medications
- Vision care
- Vision insurance/plan premiums (paid with after-tax dollars only)
- Vision products (over-the-counter)
- Vitamins (prescription)
- Vitamins for general health purposes (over-the-counter)
- Walking aids (canes, walkers, crutches and related supplies)
- Warranties or other charges for future anticipated services (with none actually received)
- Wart removal treatments (over-the-counter)
- Wound care (over-the-counter)
- X-ray fees (dental)
- X-ray fees (medical)
As you can see, a great deal of important (and usually expensive) items can be covered with HRA funds. These expenses include both items for optimal wellness and comfort, as well as critical expenses involved with serious chronic illness, disabilities, reproductive health, and accidents. All can potentially be covered from non-tax income thanks to the HRA.
Note that the direction is to return control of medical spending to the employee, allowing them to use their discretion on where to spend their health care money, rather than attempting to provide “health care” in a way that attempts to be comprehensive. With an HRA, the patient is more in-control. They can decide where to spend their health care dollars, while shopping and negotiating for the best price.
Health Reimbursement Arrangements are commonly offered as an assist to a High Deductible Health Plan (HDHP). HDHP’s reduces premiums. These save on health care coverage costs for employers, and ultimately the employees.
HRA contributions are funded by savings from lower premiums.
By funding a Health Reimbursement Arrangement, the employer bridges between higher deductibles and the point at which high-deductible insurance "kicks in.
Employers are free to establish proper, allowed expenses for the Health Reimbursement Arrangement funds. They range from all personal-health items to emergency room costs, only. Thanks to their flexibility, HRA plans allow the employer to control health care costs while still offering a great employee benefit.
With HRA’s, health care expenses are transparent to employers and employees. HRA’s make the actual cost of health care more evident to all.
Employees become smarter about health care as they track their own health care expenses. It’s as though they’re playing with their own money – which in effect they always are. The difference is the HRA makes it very evident and real to them.
An employer may choose to offer a Flexible Spending Account (FSA) plan in conjunction with a Health Reimbursement Arrangement.
A Flexible Spending Account is an employee-funded benefit that allows employees to set aside pretax funds to pay for medical expenses. Flexible Spending Account funds are contributed by salary deduction, with the amount is determined by each participating employee.
The great thing: They can be combined. Combining an FSA with a Health Reimbursement Arrangement can help bridge the gap between the employer-sponsored HRA and the health insurance plan. Again, this pertains mainly to high-deductible health care plans.
When a medical expense can be paid out of either the FSA or the HRA, employers or plan administrators can determine the order in which each account reimburses the expense. In some instances, all will be paid out of the HRA, while in others, the FSA could cover the expense. In some cases, both accounts might be drained to cover a major event. This is important because expenses reimbursed under an HRA cannot not be reimbursed under any other plan, including a Flexible Spending Account. The same applies in reverse.
HRA’s are very flexible and allowing employers to design their plans to meet the unique needs of their employees, and their overall budget.
HRA’s can be used to reimburse a health plan’s deductible, copay, and co-insurance. Expenses pertaining to the employee or their family are covered. An EOB (Explanation of Benefit) form showing evidence of how the expense applies to the deductible is generally required proof for reimbursement.
Will It COBRA?
HRA’s are compatible with COBRA benefits continuation. Employees who are terminated, laid-off, or otherwise must move on from their current position can continue to use the accrued HRA funds. The employer determines the proper premium amounts to include HRA expenses. Note that in the case of a COBRA continuation, you’re no longer being paid as an employee of your former company. This means you’ll be required to largely fund your own HRA yourself. COBRA rates aren’t very appealing even minus the existence of the HRA, so be ready to pay extra.
Also -- note some HRA’s include a spend-down policy in cases of termination. That means you’re able to submit qualifying expenses for coverage by the HRA while your accrued balance is being spent down. This doesn’t apply in every case, so check with your individual plan.
How to Use Your HRA
Your HRA rewards savvy shopping. When you’re in control of how you spend your discretionary funds provided under the HRA, it’s up to you to find the best deal and make them go as far as they can. That can mean comparing the out-the-door cash price for treatments, therapies, and procedures to be paid out of the HRA. It also means looking for the best deal on drugs, equipment, and supplies. Think of it as health economics rather than home economics, and you’ll be on the right track.
A great example is the provision of dental services. Dentistry is very much a cash-centric business. Many dental patients are shocked at how little dental insurance really pays when serious work is required. Shopping using the cash-like benefit of the HRA allows you to get more for your money in full awareness of the true costs of treatment.
With an HRA, you’ll find your whole approach to being a health care consumer is transformed. You’ll start thinking in terms of “health management” rather than “illness management,” as has become traditional under the traditional health insurance. You are in power as a consumer with the HRA, especially when combined with the FSA (flexible spending account).
Studies indicate only 20-50% of employees actually use their health benefits. That means employers are paying a lot to cover employees who don’t benefit from the coverage. HRA’s are great in that they allow employers to tailor the sort of coverage their specific employees are likely to need. They reduce insurance “bloat” while improving care as it’s actually used among employees in real-life.
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