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What is an HRA and how does it work?

6 minute read

A Health Reimbursement Account, also called an HRA or Health Reimbursement Arrangement, is an IRS-approved, employer-funded tool to help you pay for certain out-of-pocket medical costs.

Here are some key features to keep in mind when deciding whether an HRA is right for you:

An HRA is the least common type of medical expenses account.

Flexible Spending Accounts and Healthcare Savings Accounts are more prevalent than Healthcare Reimbursement Accounts, which are unique in that they require 100% employer funding. In fact, just 7% of employers with insurance benefits offer HRAs1. Check with your employer to see if an HRA is an option for you.

If you’re self-employed, you can’t have an HRA.

An HRA is an arrangement between an employer and employee, so if you work for yourself, an HRA is not an option for you.2

HRAs are always 100% employer funded.

Unlike Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs), you can’t contribute to an HRA. HRAs must be funded exclusively by a company or organization, although not all employers offer HRAs. Check with your HR department to see if one is an option for you.

You don’t own the money in your HRA.

Even though the money in your HRA will be available to you, it’s 100% funded, owned and managed by your employer.

Your HRA isn’t really an account.

Even though HRAs are commonly known as Healthcare Reimbursement Accounts, the more accurate name for them is Healthcare Reimbursement Arrangements. That’s because an HRA is technically not an account, and the money in an HRA cannot be invested or earn interest.3 It’s simply an amount your employer agrees to make available to you for eligible out-of-pocket medical expenses.

HRAs offer tax-free money for you to use.

Because you don’t put any of your own earnings into an HRA, you don’t pay taxes on the money. HRAs offer extra money above and beyond your pay, with certain rules and conditions attached i.e., the money must be used for approved medical expenses.

There is no set maximum for an HRA.

Unlike with FSAs or HSAs, there are no rules about how much an employer can contribute to an HRA. The amount made available to you for eligible expenses is completely up to the discretion of your employer.4

Although an HRA won’t lower your taxes, it will increase your spending power.

Unlike with most other healthcare expense accounts, HRA dollars don’t come out of your earnings, so they won’t affect your taxes at all. The funds are simply extra, tax-free money your employer gives you for eligible expenses, so you don’t have to spend your income on those things.

The IRS determines what kinds of expenses can be reimbursed through an HRA.

The IRS has rules about what kinds of HRA expenses are eligible for reimbursement. Most HRAs will reimburse for deductibles, coinsurance and copays.5 Other types of expenses may also be eligible for reimbursement.

Your employer ultimately decides what types of expenses you can be reimbursed for through your HRA.

Although the IRS determines the overall rules for HRA-eligible expenses, your employer can choose which IRS-approved expenses to allow and which not to allow. Check with your employer for the full list of eligible expenses for your particular HRA. Some expenses deemed eligible by the IRS that may be eligible through your HRA include6:

  • Acupuncture
  • Ambulances
  • Bandages
  • Birth control pills
  • Capital expenses to modify your home for a disability
  • Chiropractor visits
  • Dental treatment
  • Disabled dependent care expenses
  • Eye exams
  • Eye surgery (vision correction)
  • Fertility enhancement
  • Guide dog (or other service animal)
  • Hearing aids
  • Insurance premiums
  • Intellectually and developmentally disabled housing
  • Laboratory fees
  • Lead-based paint removal
  • Legal fees for medical expenses
  • Medications
  • Nursing home
  • Nursing services
  • Oxygen (necessary for medical condition)
  • Psychiatric care
  • Psychoanalysis
  • Smoking cessation programs (and prescriptions)
  • Special education
  • Substance abuse treatment (drug or alcohol)
  • Transportation (during medical treatments)
  • Tuition for special education
  • Weight-loss programs
  • Wheelchair
  • X-rays

Your employer decides how you can access HRA funds.

Like most things about an HRA, how you get reimbursed for eligible expenses is up to your employer. Some may allow you to use a debit card to pay for expenses, others will require that you pay up front, then request reimbursement with supporting documentation. Some plans may even be set up to reimburse the provider directly.

Do HRA funds rollover? Employers can decide whether or not to roll over funds each year.

Your employer can decide whether or not to allow you to carry over unused funds from one year to the next. They may allow you to carry over the full amount, may allow only a portion to be carried over, or may simply require that you forfeit any unused funds at the end of the year.7

You can’t cash out your HRA.

Unused HRA funds are either rolled over to be available for eligible expenses the following year or retained by your employer — and your employer can decide which of these options to allow. But you can never choose to withdrawal HRA money for unapproved use.

An HRA can be used with an FSA or HSA.

You can have an HRA and still take advantage of an FSA (Flexible Spending Account). When paired together, qualified expenses first get paid through the FSA, then once those funds are used, an HRA can kick in for any more qualifying expenses.8 For using HRAs and HSAs together, there are very specific rules, but you may be able to take advantage of both in certain circumstances.9 Ask your HR department and a tax professional for more information about using HRAs in conjunction with other medical expenses accounts.

HRA benefits can sometimes continue if you lose your job.

You may be able to keep your HRA benefits under the federal COBRA law if you lose your job.10 Check with your employer to learn about the particulars of this option.

An HRA can benefit both employees and employers.

An HRA is a great perk for you because it’s extra money to use on eligible expenses. It can also benefit your employer by offering tax deductions and helping them attract and retain employees. Check with your HR department to see if an HRA is available where you work.

Sources:
1“How to Use FSAs, HSAs, and HRAs to Cut Your Healthcare Costs,” Donna Rosato, 11/9/18. Retrieved from
https://www.consumerreports.org/healthcare-costs/how-to-use-fsas-hsas-hras-to-cut-healthcare-costs/
2“How HRAs Work,” Amy Fontinelle, 3/27/17. Retrieved from
https://www.investopedia.com/articles/personal-finance/112015/how-hras-work.asp
3“How HRAs Work,” Amy Fontinelle, 3/27/17. Retrieved from
https://www.investopedia.com/articles/personal-finance/112015/how-hras-work.asp
4“What Are Health Reimbursement Arrangements (HRAS)?” by healthequity.com. Retrieved from
https://healthequity.com/hra/
5“HRA Plans: What You Need to Know About Qualified Expenses, Taxes, and More,” by DataPath. Retrieved from:
https://dpath.com/hra-plans-expenses-taxes/
6“IRS Publication 502 and HRA Eligible Medical Expenses,” Amanda Giacobassi, 12/4/18. Retreived from
https://www.peoplekeep.com/blog/bid/143274/irs-publication-502-and-hra-eligible-medical-expenses
7“Health Reimbursement Arrangement,” by TASC. Retrieved from
https://www.tasconline.com/biz-resource-center/plans/health-reimbursement-plan/
8“A quick take on Health Reimbursement Arrangements,” by Bank of America. Retrieved from
https://healthaccounts.bankofamerica.com/a-quick-take-on-hra.shtml
9“Can I Have an HRA and an HSA at the Same Time?” by Ask Gusto, updated 8/16/18. Retrieved from
https://gusto.com/ask-gusto/health-insurance/can-hra-hsa-time/
10“Health Reimbursement Arrangement,” by TASC. Retrieved from
https://www.tasconline.com/biz-resource-center/plans/health-reimbursement-plan/
*Subject to credit approval. Minimum monthly payments required. See carecredit.com for details.

This content is subject to change without notice and offered for informational use only. You are urged to consult with your individual business, financial, legal, tax and/or other advisors and/or medical providers with respect to any information presented. Synchrony and any of its affiliates, including CareCredit,(collectively, "Synchrony") makes no representations or warranties regarding this content and accept no liability for any loss or harm arising from the use of the information provided. Your receipt of this material constitutes your acceptance of these terms and conditions.
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