Medical expenses can become overwhelming fast. Without a proper health insurance plan or help, many people end up drowning in medical bills and can’t climb out of debt. This can cause a lot of stress and bring down employee morale.
Fortunately, many employee benefits packages provide several options for having certain medical or health care expenses covered, for both yourself and those who depend on you. One of these options is the versatile HRA.
What is an HRA?
An HRA is an employer-funded plan that is available to employees for their qualified medical expenses. It covers a wide variety of medical expenses such as insulin, prescription drugs, and doctors’ appointments. The plan runs on employer contributions only, which means only employers decide how much to give. Even though it’s not based on co-pays, both employer and employee can receive tax advantages from the usage of this program.
Almost everyone can make use of an HRA in some way or another, but there are details and specifications you should be aware of. Employers also have a good deal of control over the plans and can make a lot of decisions that affect the benefits employees will receive. Employers are smart to handle this program carefully and offer decent contributions – this can benefit your employees’ experience.
What is an HRA?
With so many tax-deductible plans and benefits out there, it’s important to understand the specific plan design of each one. Some plans are meant for specific types of people or situations. But, an HRA is one option that is useful in many ways.
What does HRA stand for? It stands for “Health Reimbursement Arrangement.” It’s important to understand the significance of the word “arrangement” in this title. A health reimbursement arrangement is, indeed, an arrangement -or plan-, and not an account like Flexible Spending Account (FSA) or Health Savings Account (HSA).
What is an HRA plan? The “plan” is the amount of money and it’s related details, such as plan premium, that the employer sets. It is funded entirely by the employer, who can then claim their contributions as a tax deduction. Employees who do not qualify for HSA are mostly enrolled in HRA. Your employer can opt for an HRA that gives you coverage for your coinsurance only.
According to the previous rule, just like HSA for which you have to enroll in a High Deductible Health Plan (HDHP), you had to enroll in a Group Health Plan for HRA. However, the new rule states that with a few limitations, employees can get Individual Coverage HRA and Excepted Benefit HRA. For Individual Coverage HRA, the employee must have an Individual Health Insurance plan or Medicare. On the other hand, Excepted Benefit HRA does not have to be integrated with any major medical coverage.
To use the funds, the employee must first incur pocket expenses. They cannot withdraw funds, but can only request a reimbursement once they have paid the expense.
There are times when reimbursement may be immediate if the employer provides an HRA debit card, but this will be up to the company. Providing a debit card for the HRA plan is convenient and helpful to the employee and can remove a layer of stress from their lives, thus improving employee engagement.
HRA’s allow reimbursement for many different types of medical expenses, both to prevent or alleviate a medical problem – whether physical or mental. Some qualified expenses include:
- Prescription medication
- Annual physical
- Meals at a medical facility
- Birth control
- Psychologist or psychiatrist
- Substance abuse treatment
- Transportation costs related to medical care
- And much more
The HRA will cover these expenses for yourself and/or your spouse and any dependents you may have. Depending on the type of plan your employer chooses and what they decide to do, the HRA can also cover health insurance premiums like dental or vision.
While an HRA can have many health benefits for you and your family, it is designed to cover medical expenses and prevention only. There are many things you can do and expenses you can incur in the name of general health and maintenance. This can include:
- Teeth whitening
- Maternity clothes
- Funeral services
- Health club memberships
- Marriage counseling
- Non-prescription drugs
These are just a few examples of health-related expenses that are not covered by an HRA.
It is also important to note that the employer has the final say on what expenses will be covered. Just because an expense is deemed eligible by the IRS, doesn’t mean every employer will allow it. They will make their decision, and all information and limitations will be documented and provided to all employees receiving the benefit.
Moreover, you cannot take your HRA with you if you leave the company. Some plans, however, can roll over a portion of your unused funds to next month if you stayed at the same company.
What is an HRA Account?
Many refer to their HRA fund as their Health Reimbursement Account, though it doesn’t function as a normal “account” would. Employees do not own the money in their HRA, and they can’t make cash withdrawals or contributions of their own.
However, each employee will have an individual fund in the amount decided upon by the employer. They are entitled to reimbursement from this fund for qualifying medical expenses. This fund is what is known as the “HRA account.”
How Does an HRA Work?
At this point, you may be wondering – how does an HRA work? The whole concept is a little bit confusing and more complicated than a regular medical plan might be, but it makes sense when you break it down. The way it works makes sure the money is secure and only used on eligible expenses.
An HRA has five total steps from beginning to end:
- The employer sets an allowance – this will be each employee’s maximum amount limit for the year.
- The employee makes a medical purchase out of their own pocket.
- The employee then submits proof of the expense they incurred.
- The proof and documentation are reviewed by the plan administrators.
- When approved, the money is withdrawn from the employee’s available balance and given to them.
This method also gives employers a tax benefit for offering the program, and it allows the money to be tax-free for employees who use it. This is especially valuable for the employees as this means you have more to spend than if you simply received the cash – as this would be taxed. It’s one way to avoid the high cost of disengaged employees – these plans can keep employees happier and therefore more engaged.
HRA Plan Types
There are four different types of HRA plans available. The type that you are offered depends on your employer and which type they choose to offer. Employees won’t have any say in regards to which type they are part of, but it’s good to know the difference.
- Qualified small employer HRA. This is currently the most popular type of plan. It is designed for small businesses with fewer than 50 employees. This type of plan allows employers to give different allowance amounts to employees based on family size. Amounts can roll over from month to month as well as year to year. The plan will be automatically offered to full-time employees, and a company can choose to offer it to part-time employees if they wish. A business cannot offer a QSEHRA at the same time as a group policy.
- The group coverage HRA. This is available to businesses that also offer a group health insurance policy. They can offer a monthly allowance that covers things not eligible under the group policy. Businesses of all sizes can offer group coverage HRA.
- One-person stand-alone HRA. Available to businesses of any size who want to offer an HRA to one employee only.
- Retiree HRA. This is available to companies who wish to only offer an HRA to retired employees.
The Importance of HRA Plans
An HRA plan is an extremely beneficial and valuable thing to offer employees. The large number of expenses it covers means that most everyone can use it and get some help taking care of themselves and their families.
Without programs and benefits like this, there are people who would either suffer needlessly or be forced to sacrifice in other important areas of their life.
Not only does it offer something significant to employees, but employers can benefit as well. The tax benefits are an obvious attraction, but it can also go a long way in both recruiting and retention.
A robust health plan is attractive to prospective employees and may be the deciding factor between your company and another one in their job search. A good plan is also something employees will stick around for. They will stay because of the help they are offered, but also because they feel cared about and valued. When they feel this way, you will be one step closer to eradicating employee turnover.