Health Reimbursement Arrangement (HRA)

Health Reimbursement Arrangement

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What is a Health Reimbursement Arrangement?

A Health Reimbursement Arrangement (HRA) is an employer-funded account that is designed to reimburse employees for qualified medical expenses that are paid for out-of-pocket. There are no annual contribution limits on HRAs; however, the employer usually sets the contribution below the annual deductible. HRAs are often designed to operate with a high deductible health plan (HDHP), thereby reducing premium costs while encouraging employees to spend wisely.

Your employer sets up the HRA, determines the amount of money available in each employee’s HRA for the coverage period, and establishes the types of expenses the funds can be used for.

 

What are the benefits of an HRA?

You may enjoy several benefits from having an HRA:

  • Contributions made by your employer can be excluded from your gross income.
  • Reimbursements may be tax-free if used to pay for qualified medical expenses.
  • Any unused amounts in the HRA can be carried forward for reimbursements in later years.

 

Contributions to an HRA

Your employer funds the account, so it costs you nothing out-of-pocket. There is no limit on the amount of money your employer can contribute to the accounts. Additionally, the maximum reimbursement amount credited to the HRA in the future may be increased or decreased at your employer’s discretion. The maximum annual contribution is determined by your employer’s plan document. There may also be a cap amount for the HRA. Your employer can choose to fund your HRA with an annual contribution or on a monthly basis.

 

Qualified Medical Expenses

Qualified medical expenses are those specified in the plan that would generally qualify for the medical and dental expenses deduction. Examples include amounts paid for doctors’ fees, prescription medicines* and necessary hospital services not paid for by insurance. You can use your HRA funds for deductibles, copayments and coinsurance. An extensive list can be found in the Internal Revenue Service (IRS) document, Publication 502 at www.irs.gov.

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