If you are contemplating retirement, one of your foremost concerns is probably the issue of medical insurance. How will you pay for it when you are no longer receiving a regular paycheck? If remaining on your employer’s medical plan is an option, this may be something to consider. However, the retiree health care benefit sponsored by your employer may be a Health Reimbursement Arrangement (HRA) rather than a full-fledged medical plan.
What is an HRA?
A Health Reimbursement Arrangement is an interest-bearing, employer-funded account created in your name. Deposits can be made completely tax-free¹, meaning that you receive 100% of the value of each benefit dollar.
The HRA account is designed to reimburse retirees for their eligible medical expenses and/or premiums to offset their out-of-pocket costs. Your employer determines which qualified medical expenses are eligible for reimbursement under the plan. Your employer may also decide to fund the HRA using your accumulated leave, such as unused sick leave, unused vacation pay, severance, or other retirement incentives.
What are my HRA Options?
There are two HRA options designed to benefit retirees: a Defined Contribution HRA or a Retiree HRA.
- With a Defined Contribution HRA, funds are deposited while you are still actively working, growing over time, and becoming available for use upon retirement or separation of service.
- With a Retiree HRA, funds are deposited in a lump sum upon retirement/separation of service. The funds are invested once deposited and can be used immediately upon deposit.
For both types of HRA, account balances roll over year to year, qualified expenses are reimbursed tax-free1, and funds can be used to reimburse eligible medical expenses incurred by you, your spouse, and any qualifying dependents.
Is an HRA really right for me?
While HRAs have been around since 2002, this type of benefit may be uncharted territory for you. One of the most common misunderstandings that retirees have about the HRA is that they’re not receiving their full benefit simply because they’re not collecting a cash payout. In reality, you would receive more money because there is no liability for FICA, Federal, or State income taxes, resulting in a “triple tax-free” benefit for you. That means deposits made into your account, any earnings on your account balance, and any reimbursements made from the account are tax-free1, ensuring that you receive dollar for dollar the benefit amount you were promised.
The HRA is a valuable vehicle for bridging the gap between retirement and Medicare eligibility. Given this financial incentive from your employer, you may consider retiring earlier than planned, and you may choose to seek an alternative health care option, rather than remaining on your employer’s plan. To learn more about the long-term benefits of an HRA solution and about what an HRA is—as well as what it’s not—click here to download our educational piece, Common HRA Misconceptions.
¹Not subject to FICA, Federal or State income taxes