Find out how HRAs work, are different from other medical savings options, and how to use one to dramatically cut the cost of healthcare and save more money.
Find out how HRAs work, are different from other medical savings options, and how to use one to dramatically cut the cost of healthcare and save more money.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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From expensive over-the-counter medications to prescription drugs to high copayments when you see the doctor, healthcare costs can take a massive bite out of your budget. Fortunately, there are ways to cut those expenses using various tax-advantaged plans and medical savings accounts.
This post will review a terrific benefit an employer of any size can offer: a health reimbursement arrangement (HRA), also called a health reimbursement account. I'll explain how HRAs work, how they're different from other options like an FSA and HSA, and how I use one to cut the cost of healthcare and save more money.
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What is a health reimbursement account (HRA)?
An HRA is a benefit plan that some employers offer to help workers pay their and their families' qualified healthcare expenses. Unlike a health savings account or HSA, an HRA can only be funded by an employer and doesn't have to be paired with a high-deductible health plan.
With an HRA, employees don't pay a penny into the account because contributions or reimbursement payments come from an employer who owns the funds. Employees must be covered by a health plan but can purchase any product they wish. They can use HRA funds to pay eligible healthcare expenses and, in some cases, insurance premiums, tax-free, up to an annual limit set by the IRS or the employer.
Therefore, you can only have an HRA if your employer offers one or you're self-employed with at least one part- or full-time W-2 employee. But you can't have an HRA if you're a solopreneur with no employees other than yourself. I'll review my HRA setup, which may also work for you, in a moment.
A company can offer an HRA in combination with a group health plan or as a stand-alone benefit. For instance, if you run a small business, you may give employees an HRA instead of a health plan. The HRA would reimburse workers, up to your set limit, for their qualified healthcare expenses.
Employees can also have an HRA with other medical savings plans, like a flexible savings account (FSA). In some cases, you can have an HRA and an HSA. I'll briefly cover using an HRA with other savings plans.
Enrolling in an HRA can also affect your ability to qualify for a premium tax credit under the Affordable Care Act (ACA) if you purchase health insurance on a federal or state marketplace. It depends on the type of HRA you're offered, how much your employer reimburses, your income, and family size. Learn more about getting a subsidy with an HRA.
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How do you spend funds in a health reimbursement account (HRA)?
Employers decide how workers can access their HRA funds. In many cases, you pay eligible healthcare expenses upfront and then submit them for reimbursement on a monthly or quarterly basis up to an annual limit. Once approved, your employer cuts you a check or sends a direct deposit to your bank account.
Some employers fund your HRA at the beginning of the year and issue a debit card for you to pay qualified healthcare costs up to your annual benefit limit.
However, unlike an HSA, an HRA isn't a bank account where you earn interest or invest the balance. You can't cash out an HRA, even if you don't use it all by the end of the year. Its only purpose is to hold the funds provided by your employer to spend on eligible healthcare.
What are the tax benefits of a health reimbursement account (HRA)?
The beauty of an HRA is that the funds you receive from your employer aren't included in your gross taxable income. In other words, you don't pay any federal income or employment tax on HRA funds, which is a terrific benefit!
I employ my husband to work part-time in my business and offer him an HRA as part of his compensation. He submits our family healthcare expenses, including mine, to my business for a monthly reimbursement. My company can claim a tax deduction for the reimbursements, and my husband is paid tax-free income from my business.
What expenses are HRA-qualified?
The expenses you submit for reimbursement or pay using an HRA must have been incurred on or after the date you enrolled in the HRA. Qualified healthcare expenses are generally the same as those that qualify for a medical tax deduction. They include amounts not covered by your health insurance, such as your deductible and copayments.
Some expenses you can use HRA funds for include:
You can learn more about qualifying healthcare expenses in IRS Publication 502, Medical and Dental Expenses.
Unlike with an HSA, you can use HRA funds to pay premiums for insurance like health, dental, and vision, depending on your HRA type, which I'll review in a moment. You can even get reimbursed for amounts paid for long-term care insurance.
However, an HRA does not cover expenses like gym memberships, childcare, teeth whitening, and cosmetic procedures. Using it for non-qualified expenses means they are added to your gross income for the year. For instance, if you spend HRA funds on vacation or groceries, you must pay income taxes on those amounts.
Note that if you continue employer-sponsored health insurance through COBRA after you leave a job, you can still use HRA funds for premiums until your coverage ends. But generally, if you leave your employer with unused funds in an HRA, they own and keep the money.
ALSO LISTEN: How COBRA health insurance works
Different types of health reimbursement arrangements (HRAs)
Here are three types of HRAs available to different employers:
1. Qualified small employer HRA (QSEHRA): This plan is for employers that don’t offer a group health plan with fewer than 50 full-time employees. However, employers may exclude certain classes of workers, such as seasonal or temporary employees, if they wish.
Workers can receive reimbursements for their individual health plan premiums and qualified out-of-pocket healthcare costs up to an annual limit set by the IRS. For 2024, the QSEHRA limit is up to $6,150 per employee or $12,450 per employee with family coverage.
Employers can allow unused QSEHRA balances to be carried forward to the next plan year up to an aggregate limit.
2. Individual coverage HRA (ICHRA): This plan is for employers of any size. It can reimburse employees for their individual health insurance premiums and qualified out-of-pocket healthcare costs with no maximum.
However, if an employer also offers a health plan, workers can enroll in the insurance or the ICHRA, but not both benefits. Employers can set different monthly allowances based on specific employee classes, such as full-time, part-time, and seasonal.
Employers can allow unused ICHRA balances to be carried forward to the next plan year up to an aggregate limit.
3. Group coverage HRA (GCHRA): This plan supplements an employer-sponsored group health plan. Employees receive reimbursements for qualified out-of-pocket healthcare costs their health plan doesn't fully cover, like deductibles and copays, but not for plan premiums (including those purchased on the open market).
Like ICHRAs, GCHRAs have no maximum contribution limits, and employers can set different allowances based on employee classes.
These aren't the only types of HRAs, but they may be the most common. You can learn more about HRAs in IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
What are the rules for using an FSA and an HRA?
Some companies may offer workers additional tax-advantaged benefits, such as a flexible spending arrangement, also called a flexible spending account or FSA, in addition to an HRA. However, having an HRA can affect your eligibility for other tax-advantaged accounts, so it's essential to understand how they work together.
An FSA can only be offered by an employer; however, it's primarily funded using an employee's pre-tax income. Employers can also contribute to an FSA, but they aren't required to.
You put funds into an FSA that you plan to use for out-of-pocket healthcare and childcare expenses for you and your family. However, you can't use it to pay health insurance premiums.
If you participate in an FSA for 2024, you can contribute up to $3,200 through payroll deductions, regardless of your marital or tax filing status. Your contributions won't be subject to federal income or payroll taxes, which is terrific.
However, a downside of FSAs is that you generally must spend all the funds within the plan year unless your employer offers a short grace period or a small carryover amount to use in the following year. After the year or grace period, you lose leftover funds in an FSA. So, you don't want to contribute more than you're sure you'll spend on qualified expenses.
You can pair an HRA with an FSA; however, qualified expenses must be paid from the plan that the employer designates as primary. Once depleted, the second plan can cover eligible expenses.
What are the rules for using an HSA and an HRA?
If you are enrolled in an HSA-qualified, high-deductible health plan, you can contribute pre-tax funds to a health savings account (HSA). You can then spend the funds tax-free on various healthcare costs; however, you can't use them for health insurance premiums. However, you can spend HSA funds on COBRA, Medicare, and long-term care insurance.
While an HRA is employer-funded and owned, you own an HSA, even if you get it through work. While an employer may contribute to your HSA, you own the account and can take it with you if you leave your job.
For 2024, you can contribute up to $4,150 to an HSA if you have an individual health plan and up to $8,300 for a family plan. If you're over 55, you can contribute an additional $1,000.
One advantage of an HSA is earning interest and having the ability to invest the balance. Plus, unlike an FSA, there's no spending deadline.
You can have an HRA and an HSA simultaneously; however, there are strict rules regarding their use together. The main point to remember is that you can't double-dip by paying for an expense with an HSA and submitting it for an HRA reimbursement.
While it gets complicated, some HRAs don't allow you to contribute to an HSA if they reimburse you for healthcare expenses. The idea is that it could be too easy to double up on the tax benefits of both accounts.
However, some HRAs allow you to opt out of reimbursement for healthcare expenses but keep the reimbursement for insurance premiums. That works well with an HSA, which can never be used for premiums (unless you're unemployed).
So, if your employer offers an HRA and you purchase an HSA-eligible health plan, be sure you understand what's allowed before using an HSA. If you have to choose between an HRA and an HSA, always use the account that is likely to give you the largest tax savings. If your employer reimburses more than your HSA contribution limit, you’ll probably get more savings by enrolling in an HRA.
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That's all for now. I'll talk to you next week. Until then, here's to living a richer life.
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