The acronym "HRA" stands for Health Reimbursement Arrangement, which is a defined contribution plan often tied to a high deductible insurance policy. HRAs allow employers to reimburse their employees for a portion of their medical costs using tax deductible funds.
When employees are insured under a high deductible policy, each employee must pay more money out-of-pocket for medical costs before the insurance company will begin to pay its portion. Employers typically choose high deductible policies when they can't afford to offer more coverage, but the extra cost associated with the deductible is often burdensome for employees.
To reduce the financial strain on employees, employers sometimes open HRAs in addition to the high deductible insurance policy. Employers deposit money into the HRA, which can then be used to reimburse employees when they incur out-of-pocket medical expenses. The funds the employer deposits into the account is tax-deductible, and the money in the account can be used to reimburse employees for any tax-deductible medical expense.
It is important to note that the IRS has established certain rules that govern HRA accounts. When the plan is established, employers must define the types of expensive the HRA will cover. They must also limit the amount of money each employee is entitled to receive as reimbursement. Funds from HRAs can only be dispersed to cover the medical expenses of current employees, former employees and the dependents of employees.
The combination of a high deductible insurance policy and an HRA is ideal for some employees. It allows the employer to save money on health insurance coverage without placing an unreasonable burden on employees. Because an HRA's limits and covered expenses are determined by employers, they also provide employers with more control and flexibility when it comes to medical coverage. Furthermore, high deductible HRAs offers a significant tax advantage to employers who open them.
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