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What is an HRA (Healthcare Reimbursement Account)?
A Health Reimbursement Arrangement (HRA) is a spending account set up by your employer that can be used for certain medical expenses. The HRA is funded entirely by your employer, and can be used to pay medical expenses until the fund is completely spent or until insurance plans provide coverage. Employees may not contribute to their HRAs. The employer determines the amount in each fund per employee, what expenses the funds can be used for, and if employees can carry over unspent funds into the following year. Typically, employees forfeit access to their HRA when they leave the employer.
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Many employers who provide medical plans with high deductibles establish HRAs in each employee’s name to help pay for eligible out-of-pocket expenses. However, when the HRA funds run out, the employee is responsible for paying remaining expenses out of his own pocket until the deductible on the medical plan is satisfied and insurance coverage begins. The combination of an HRA with a high-deductible plan gives employees some cushion in paying expenses toward their deductible, while saving the employer money in paying lower premiums on the high deductible plan.
HRAs encourage employees to carefully monitor their own spending on health care. Employees are encouraged to try to be conservative in the spending of their HRA so that funds may be rolled over into the next year, in cases in which the employer allows this to happen. In that case, employees can accrue a large amount in their HRA to spend toward a large medical expense that may happen in the future. When an employee leaves an employer, the remaining balance in the HRA cannot be paid out to him; however, HRA funds can contribute to medical expenses in retirement for employees who retire.
The IRS issued guidance for HRA plans in 2002. It is similar to the 125 Cafeteria Plan, or Flexible Spending Account (FSA), which also provides employees with a fund for covering medical expenses. Unlike the FSA, however, an employee’s HRA account often allows unused funds to be carried over in subsequent years. Another important difference between the FSA and the HRA is that employees can draw down their HRA funds as they need them, whereas FSAs issue the employee the total amount of funds for the year on the first day of the employer’s fiscal year. So an HRA allows for a better cash flow situation for the employer.