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Industry Terms

What is an HRA?

HRA is a Health Reimbursement Arrangement, a tax-free fund solely funded by the employer to cover employees’ medical expenses. HRAs may be offered along with other employer-provided benefits such as the FSAs or High Deductible Health Plans.

Employers decide how much they can contribute and if and how much the unused amount can be carried forward to the next year. The employer’s contribution amount is not subject to any IRS regulation.

However, Small Business HRAs cap annual employer contributions at $4,950 for an Individual (Single) and $10,000 for a Family. A qualified Small Business HRA is offered by employers that have fewer than 50 full-time employees and do not offer group health plans to any of their employees.

Distributions from HRA are made to reimburse qualified medical expenses incurred by the employee upon submission of appropriate receipts. Qualified expenses may include health insurance premiums, out-pocket expenses of a health plan, long-term care coverage expenses, etc. Distributions made as cash would be treated as employees’ income.

HRAs allow reimbursements to current and former employees, their spouses and dependents, and spouses and dependents of deceased employees.

How does it benefit the employer?

HRAs provide more flexibility to employers both from plan design and funds usage perspectives. Because they lack portability, employers own unused funds not carried forward and unused funds of terminated employees. Particularly relevant to industries with high employee turnover.

HRAs act as a vehicle for small business employers who do not offer group health insurance to their employees, to contribute towards employees’ healthcare expenses.

HRAs ease employers’ cash flow needs as they are funded only when claims are submitted by employees after the occurrence of expenses.

Employers are not subject to Payroll taxes and Social Security taxes on the contributions they make as the contributions are not part of employees’ income.

How does it benefit the employee?

HRA contributions by employers are tax-free benefits to employees to manage their healthcare expenses, whether it is premium payments or out-of-pocket expenses.

Example Scenarios of Application

  • An employer may contribute to an HSA plan funds to promote the employees’ enrollment into a High Deductible Health Plan. By having more of the employees enroll in an HDHP, employers create a sense of shared accountability by the employees on their healthcare decisions and usage. In the long run, this can lead to cost containment due to improved or optimal utilization of care.
  • An employer may not contribute to an employee’s HSA account. However, provide an HDHP as a competing plan with a significantly reduced premium to a traditional and richer plan with embedded deductible and very low copays. The employee may prefer the HDHP option by investing into an HSA fund the differential amount that comes as a premium advantage of the HDHP plan that is eligible for HSA.

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