Understanding Health Reimbursement Arrangements

Health Reimbursement Arrangements (“HRAs”) are an important part of the employee benefits landscape, offering a flexible way for employers to help offset healthcare costs. These employer-funded accounts allow employees to be reimbursed for qualified medical expenses, providing significant financial support for out-of-pocket healthcare costs.

What is an HRA?

An HRA is an employer-funded account that reimburses employees for eligible healthcare expenses. Unlike Flexible Spending Accounts (“FSAs”), HRAs are fully funded by the employer, meaning employees do not contribute their own money to the account. Employers set the reimbursement limits, which can vary based on the plan design, and decide which expenses are covered, such as deductibles, copays, prescriptions, or other qualified medical costs.

How Do HRAs Work?

HRAs are designed to provide employees with tax-free reimbursements for medical expenses. Here’s how they typically work:

• Employer Funding: Employers annually decide how much money to allocate to each employee’s HRA. This amount can vary depending on the company and the healthcare plan offered.
• Eligible Expenses: Employees can use HRA funds to cover a wide range of healthcare costs, including doctor visits, hospital stays, medical procedures, and prescription medications. Depending on the plan, some HRAs may also cover dental, vision, or other specialized healthcare expenses.
• Reimbursement Process: Employees pay out of pocket for qualifying expenses and then submit receipts for reimbursement. Alternatively, some plans may offer debit cards tied directly to the HRA for easier access to funds.
• Rollover Options: Depending on the plan, unused HRA funds may roll over from year to year. Employers have the flexibility to decide whether to allow rollovers, up to what amount, or to apply a “use it or lose it” rule.

Key Benefits of HRAs

• Employer-Funded: HRAs are entirely funded by the employer, providing employees with access to additional healthcare funds without reducing their paycheck or taxable income.
• Flexibility in Design: Employers have the flexibility to design HRA plans that meet the specific needs of their workforce, choosing reimbursement limits, eligible expenses, and whether funds can roll over.
• Tax-Free Reimbursements: HRA reimbursements are not subject to federal income taxes, making them a cost-effective way for employees to cover medical expenses.
• Paired with High Deductible Health Plans (“HDHPs”): Many employers pair HRAs with HDHPs to help employees cover out-of-pocket costs before reaching their deductible.

HRA vs. FSA: What’s the Difference?

It’s easy to confuse HRAs and FSAs, but there are a few key differences:

• Funding: HRAs are entirely funded by employers, while FSAs are funded by employees through pre-tax payroll deductions.
• Ownership: HRA funds belong to the employer, and any unused money typically reverts back to the employer at the end of the plan year, unless a rollover option is offered. In contrast, FSAs are employee-owned, though funds are forfeited if not used by the end of the year (subject to carryover or grace period rules).
• Contribution Limits: FSAs have annual contribution limits set by the IRS, while HRAs have no set limits, allowing employers to decide the amount they will contribute each year.

Excepted Benefit HRA Limits for 2025

Excepted Benefit HRAs allow employers to reimburse employees for certain limited benefits, such as dental, vision, and short-term health insurance premiums. For 2025, the maximum annual reimbursement limit for Excepted Benefit HRAs is set at $1,800. This allows employees to cover additional healthcare expenses not included in their primary health plans while ensuring compliance with the Affordable Care Act (“ACA”) requirements.

Since these HRAs are considered “excepted benefits,” they do not need to meet all the requirements of traditional HRAs, offering more flexibility for employers to provide additional support for specific healthcare costs.

Conclusion

Health Reimbursement Arrangements offer a powerful way for employers to provide financial support for healthcare costs while giving employees the flexibility to manage their medical expenses. Understanding the ins and outs of HRAs, from eligible expenses to how they differ from other savings accounts like FSAs, can help employees make the most of this valuable benefit.