Health Reimbursement Accounts – A Great Flexible Benefit Package

A Health Reimbursement Account is a fund created by the employer to reimburse employees for qualified medical expenses.  Just as an insurance plan will reimburse covered individuals for the cost of services incurred, an HRA will provide the cash equivalent to a traditional insurance plan.

HRAs are a newer version of the old MSA or Medical Savings Account.  The updated HRA has fewer restrictions than the old MSAs but not as many options as the newer cafeteria plans or flexible spending accounts. The one qualification for either an HRA or MSA is that the eligibility is not tied to a high deductible health plan as this is a pre-requisite requirement for a health savings account.

The health reimbursement account differs from a flexible spending account in that the employer provides funds, not the employee.  The advantage to these employer funded plans is that distributions are considered tax deductible (to the employer) and distributions are generally tax-free to the employee tax free.   Health reimbursement accounts remain with the originating employer and do not follow an employee to new employment.

The downside to HRAs is that once a plan has been established, the employer has the right to cancel or alter the plan at any time. With rising health insurance premiums, many employers are choosing to “self-insure” their employees, especially if their workforce is younger and in good health.  Although there are both advantages and disadvantages for both the employer and the employee, the overall benefits outweigh the risks.

There are several variations of an HRA that can offer more options.  One of these is the HRA/PRP.  This is a Premium Reimbursement Plan in which the employer reimburses the employee for a fixed amount against an individual plan.Let’s say an employer decides to reimburse and employees health premiums or medical expenses up to $400, an HRA would be established with a benefit maximum of $400 per month.  If the actual cost of the health plan exceeded the HRA maximum of $400, the employee could use the Premium Reimbursement Plan (PRP) to pay for the additional amount on a pre-tax basis.  If the premium did not reach that level, or the employee did not need individual coverage, the $400 could be used to reimburse any other eligible medical expense incurred by the employee or dependents.
An HRA covers most medical expenses incurred while the plan is in effect, such as, insurance premiums, long term care premiums for self, spouse and dependents.  However, these benefits can be redefined by the employer to be exclusionary.

A Health Reimbursement Account is one choice for employers wishing to offer flexible benefits packages to their employees.  Flexible benefits packages include cafeteria plans and flexible spending accounts.Health Reimbursement Accounts do not have the same restrictions of Cafeteria Plans.

Cafeteria plans are flexible benefit packages to which employees or employers or both may contribute.  Contributions are tax advantaged and, if used, for qualified expenses, are tax free.

Any benefit that does not defer compensation and not part of the employee’s gross income under IRS rules, is considered a qualified benefit.

Qualified benefits include:
•    Accident and health benefits (but not Archer medical savings accounts or long-term care insurance);
•    Adoption assistance;
•    Dependent care assistance;
•    Group-term life insurance coverage;
•    Health savings accounts, including distributions to pay long-term care services.

The employee estimates his or her medical expenses under an FSA or Flexible Spending Account Plan.  After the employee incurs these expenses, they fill out a claim form for those expenses and are reimbursed by the plan administrator.To help offset co-pays or insurance deductibles, this type of plan is usually used in conjunction with traditional insurance plans. 

Under an HRA a self-employed individual is not eligible for the plan.