Health Reimbursement Arrangements, better known as HRAs, are an important piece of the consumer driven healthcare market. The employer-funded account is one arm of healthcare consumerism which enables individuals to take better control of their personal medical decisions. Here are the pros and cons of this benefit account.
Pros for Employers Offering HRAs
Employers choose how much to contribute to each employee’s HRA account every year. For budgeting purposes, this can help employers plan ahead with the knowledge of their maximum expense for this benefit. In addition, many employers offer HRAs in conjunction with a high deductible health plan (HDHP), and HDHPs can result in reduced premium costs for both the employer and employees.
Employer contributions to the plan are 100% tax deductible.
As the plan sponsor and sole contributor, the employer has the ability to design a plan that best suits the needs of its workforce.
Employers do not pay out on covered expenses until after a claim is filed and adjudicated, reducing potential for benefit fraud.
A well-rounded benefits package can help employers attract and retain talent. The benefits of an HRA to the employee can make a company’s benefits package shine even more and help convince a prospect to accept the employer’s offer.
Pros for Employees
Lower Healthcare Costs
Paying for healthcare is costly. If an HRA is offered along with an HDHP, lower premiums can result in reduced healthcare costs for employees. Plus, individuals can typically use HRA funds to pay for deductibles, co-insurance, co-payments, and prescriptions, among other out-of-pocket healthcare expenses, depending on HRA plan details.
An HRA may also be offered in conjunction with a Flexible Spending Account (FSA), a tax-advantaged plan that is employee-funded and may also be used to cover additional uninsured expenses.
Personal Healthcare Freedom
Individuals have greater choice over their healthcare decisions and can use the available funds to cover eligible out-of-pocket medical expenses.
Does Not Affect Income
One of the major benefits of an HRA is that the employer’s contributions do not count toward the employee’s gross income.
When an employee files a claim for a qualified medical expense, the reimbursement is tax free.
If the employer’s plan allows for it, the unused balance can roll over to the following year. This is especially beneficial as healthcare expenses for an individual can fluctuate greatly from year to year.
Cons of an HRA
One con for employees is that because HRAs are employer-funded, the employer owns the money in the account though it is there for the individual to use. If the person leaves the company or the job is terminated, the HRA money stays behind with the employer. However, employers can offer a retirement HRA that permits former employees to utilize these funds after they retire from the company.
Standardization Does Not Apply
While plan flexibility is a pro for employers, it may not be the case for employees if their new employer offers different reimbursement rules than their previous one. Aside from following mandatory requirements for COBRA continuation, ERISA and HIPAA, HRA plans can vary between companies.
Ineligibility for the Self-Employed
A significant con for some employers is that persons who are self-employed are not eligible for an HRA. However, employee spouses of the self-employed are eligible if they are truly employees and not jointly self-employed. In simple terms, business owners are generally ineligible for an HRA plan, but legitimate employees and spouses who are employees can participate if they are receiving a regular paycheck as an employee.