If you’re not familiar with Health Reimbursement Arrangements (HRAs), the details of this powerful benefit may seem complicated at first glance. If your employer provides an HRA, we’re here to help you not only understand this cost-effective solution, but also give you the tools you need to take full advantage of it. So whether you’re brand new to the plan or simply need a refresher, below are some key highlights and need-to-know details of the HRA.
What is an HRA?
Simply put, an HRA is a triple tax-free account used to reimburse eligible medical expenses incurred by you, your spouse or any eligible dependent. Account contributions, interest accrual, and reimbursements are always 100% tax-free (hence, triple tax-free). The account, depending on plan design, can be used to pay for a wide range of eligible medical expenses, such as prescriptions, doctor’s visits, and premiums. Funds are provided entirely by the employer, and the account can be designed to never expire. MidAmerica has been administering HRAs since their introduction by the Internal Revenue Service (IRS) in 2002, offering years of experience in handling all compliance and administration in-house for clients across the country.
Why an HRA?
You may wonder why you need an HRA or perhaps why it’s considered such a valuable benefit. What it boils down to is that health care costs—both before and after retirement—are on the rise. Data shows that health care during retirement is expensive and increasing across the country. Multiple studies have revealed that the average couple retiring at 65 could need more than $388,000* to cover lifetime health care costs. Couples retiring before 65 are estimated to need $15,490 per year** to cover costs until they reach Medicare eligibility. What’s more, health care costs are only increasing. Health care expenditure as a share of US GDP has skyrocketed from 13% in 2000 to 18% in 2018 and is projected to hit 20% by 2028.*** Given these numbers, it is imperative employers provide their employees with health care stability in retirement. An HRA offers an effective solution to this health care cost dilemma. By committing funds to a triple tax-free account, an employer slashes the burden of medical expenses for their employees in retirement. As the experiences of thousands of MidAmerica clients and participants across the country can attest to, an HRA is a great way to satisfy health expenses and save money in retirement.
How does it work?
One of the defining features of an HRA is the incredible plan flexibility it allows. The details of the plan can vary depending on the needs of the client, so we always encourage plan participants to refer to their Plan Highlights**** if they have questions. However, there are certain elements that are true of all HRAs:
- Enrollment is automatic.
When an employer implements an HRA, all eligible employees are automatically enrolled in the plan.
- HRAs are 100% funded by the employer.
With an HRA, all funds are always contributed by the employer, so that the participant’s paycheck is untouched. Employers can use anything from accrued sick and vacation leave to additional incentives to fund a participant’s account.
- HRAs are always triple tax-free.
As mentioned before, these funds enter and exit the account tax-free. These tax savings include avoiding the 7.65% FICA tax for employers and employees. HRAs are invested for potential tax-free growth with either a minimum guaranteed rate of return or, if applicable, in variable investments. Once a participant is claims eligible, they can start using the funds to reimburse eligible medical expenses on a tax-free basis. This includes reimbursements for their spouse and eligible dependents, who can exhaust the account in the event of the participant’s passing.
HRA vs. HSA: Understanding the differences.
You may find yourself confusing HRAs with Health Savings Accounts (HSAs), another tax-free benefit vehicle used to reimburse eligible medical expenses. These two benefits can be easily mistaken for each other and while there are many similarities between the two, there are some key differences worth noting. While offering the same tax savings as an HRA, an HSA is more limited in its applications and flexibility. For example, an HSA can only be used in conjunction with an HSA-qualifying High Deductible Health Plan (HDHP). Additionally, an employee with an HSA cannot be covered by their own or their spouse’s Flexible Spending Account (FSA) unless it is limited to vision and dental only. An HRA, meanwhile, can be used in conjunction with any insurance or benefit plan as determined by your employer. An HRA is also unlike an HSA in that an HRA has no annual contribution limit and can only be contributed to by the employer. An HSA can receive contribution from an employee’s paycheck and has an annual limit of only $3,550 for individuals and $7,100 for families (as of 2020). Finally, an HSA is limited in the types of reimbursements it covers. While both HRAs and HSAs cover Medicare Part B and D as well as vision and dental premiums, HSAs do not cover premiums for health insurance, nor do they cover Medicare supplemental insurance. Although both plans offer savings to their plan participants, an HRA offers the plan flexibility and scope of coverage that an HSA simply cannot provide. To learn even more about the differences and similarities between these two benefits, click here.
If you still have questions about your HRA or need additional resources, MidAmerica’s Participant Services team is here to help. We provide nationwide coverage for participant education, ensuring you understand how to manage and access your benefit. Simply call (855) 329-0095 Monday through Thursday from 8:30 a.m.–8:00 p.m. ET and Friday from 8:30 a.m.–6:00 p.m. ET. You can also reach us by email at [email protected].
****A copy of your Plan Highlights is mailed to you, along with a detailed Welcome Kit, upon your employer’s initial contribution to the plan.