Back in the 1960s, when healthcare plan deductibles and exclusions became commonplace, employers started reimbursing employees for medical expenses not covered by traditional healthcare plans. In 2002, the IRS formally recognized this practice as a Health Reimbursement Arrangement or HRA and allowed employers to reimburse employees tax-free for certain expenses.

Today, amid rising healthcare costs, traditional HRAs play a critical role in helping employers and employees afford health benefits by offering:

  • Lower Premiums: When an HRA is paired with a high-deductible health plan (HDHP), premium costs are significantly reduced for employers.
  • Reimbursement Flexibility: Out-of-pocket expenses, such as deductibles, copays, and even certain vision and dental expenses, are reimbursed to employees.
  • Tax Efficiency: Both employers and employees can realize substantial tax savings with an HRA since pre-tax dollars are used for medical reimbursements.
  • Flexible Design: An HRA is fully customizable, offering employers the options to contribute an amount that fits their needs and budget, set reimbursement limits, and decide which expenses are eligible.
  • Rollover Options: Employees can often rollover unused funds to the next year, depending on the plan design.

In recent years, newer models of HRAs came into play, such as the Qualified Small Employer HRA (QSEHRA) and the Individual Coverage HRA (ICHRA). Since then, traditional HRAs are often overlooked. However, the following benefits offered by traditional HRAs should be taken into consideration when building your health benefits plan:

Employer Benefits

  • Cost Management: Employers can lower their premium costs while maintaining comprehensive benefits by integrating an HRA with a high-deductible health plan.
  • Tax Savings: Employers enjoy tax-deductible contributions and a reduced overall tax liability.
  • Enhanced Employee Retention: Employers can attract and retain top employees by offering robust health benefits, providing a competitive edge in the job market.

Employee Benefits

  • Reduced Out-of-Pocket Costs: Employees get reimbursement for out-of-pocket medical expenses, making healthcare more affordable.
  • Tax-Free Reimbursements: Employees receive these reimbursements tax-free, creating substantial tax savings.
  • Flexibility: Employees enjoy a personalized approach to healthcare spending when they use HRA funds as they see fit.

HRA Cost-Saving Example

If a company offers a traditional post-deductible HRA paired with a High Deductible Health Plan or HDHP, the HDHP would have a lower premium but a higher deductible, say $3,500 for single coverage. To remain HSA-compatible, the employer designs the HRA to cover costs after the employee has paid a minimum of $1,600 of the deductible.

Because the employee pays the first $1,600 out of pocket, they continue to be eligible to contribute to their HSA. After meeting this threshold, the HRA covers the remaining $1,900 of the deductible, reducing the employee’s financial burden. This setup allows the employee to take advantage of both the HSA’s tax-free savings and the HRA’s employer-funded reimbursements. As a result, both the employer and employees benefit from reduced payroll taxes and lower overall healthcare costs due to the lower premiums.

Types of Traditional HRAs

Four types of traditional HRAs are available to employers, and each is tailored to a specific need. As an employer, you can design the most effective benefits plan for your employees by understanding the differences in the following types:

Group Health Plan HRA (GHP HRA):

  • Eligibility: GHP HRAs are available to employees enrolled in the employer’s group health plan.
  • Benefits: This type of HRA plan reimburses a wide range of medical expenses, including deductibles, copays, and coinsurance.
  • Limitations: Individual market health insurance premiums are not reimbursable.
  • Integration: Must be integrated with a group health plan that meets the Affordable Care Act’s minimum value requirements.

Retiree-Only HRA:

  • Eligibility: Retiree-Only HRAs are available to former employees or retirees only.
  • Benefits: This type of HRA reimburses medical expenses, including individual health insurance premiums and Medicare premiums.
  • Limitations: Only available after retirement.
  • Flexibility: Employers can set annual reimbursement limits and allow unused funds to roll over.

Excepted Benefit HRA (EBHRA):

  • Eligibility: EBHRAs are offered alongside a traditional group health plan.
  • Benefits: This type of HRA covers a limited range of expenses such as vision and dental care, or certain out-of-pocket costs.
  • Limitations: Cannot be used for major medical expenses or premiums for individual market health insurance.
  • Annual Limits: Limited to a maximum annual benefit of $1,950 (as of 2024).

Post-Deductible HRA:

  • Eligibility: Post-Deductible HRAs are often used in conjunction with a high-deductible health plan.
  • Benefits: This type of HRA reimburses medical expenses only after the minimum HDHP deductible has been met.
  • Flexibility: Employers can set higher minimum deductibles for reimbursement to manage costs.

HRAs vs. Other Healthcare Accounts

Employers are often faced with a wide array of acronyms when trying to figure out health care for employees: HRA, HSA, FSA, the list goes on. This “alphabet soup” of terms may sound confusing, but once you understand the benefits of each, you’ll see how easy these options are to set up and how much money you can save over traditional healthcare plans.

HRAs vs. HSAs:

  • Health Savings Accounts (HSAs): Owned by the employee, require a high-deductible health plan, both employers and employees can contribute, employees can invest HSA dollars, funds roll over year to year, growing tax-free.
  • HRAs: Solely funded by the employer, more flexible in design, funds typically do not accrue interest or investment returns.

HRAs vs. FSAs:

  • Flexible Spending Accounts (FSAs): Funded by employee pre-tax contributions, can cover a wide range of medical expenses. often have a “use-it-or-lose-it” rule, limited fund rollover.
  • HRAs: More employer control over contributions and rollover policies, potentially provide more stable and long-term benefits.

Pairing HRAs with HSAs

One way to ramp up your tax savings is to pair HRAs with HSAs. But that’s not the only benefit. Here’s what employers and employees get from this dual benefits plan:

  1. Increased Tax Savings: Employees can use their HSA for long-term savings and tax-free growth while relying on their HRA for out-of-pocket expenses.
  2. Flexibility in Spending: Employees can use HSAs to pay for a broader range of expenses, even ones not covered by their HRA. An HRA is best used for high-deductible costs and copays, while the HSA can be used to pay for future healthcare expenses or retirement savings.
  3. Maximizing Contributions: Employers can fund the HRA to cover specific expenses, such as deductibles and copays, which allows their employees to contribute the maximum allowable amount to their HSA, further boosting their tax-advantaged savings.
  4. Investment Growth: Since HSAs allow funds to be invested, employees can enjoy a potential tax-free growth over time, making HSAs a powerful tool for long-term savings and retirement planning.
  5. Portability: Unlike HRAs, HSAs are owned by the employee and remain with them even if they change jobs or retire, offering continuous access to funds.

Look Deeper

As the healthcare landscape continues to evolve, leveraging the strengths of traditional HRAs can provide significant financial and strategic advantages. And when paired with HSAs, traditional HRAs offer numerous benefits for employers and employees alike.

Yes, traditional HRAs are still very much a thing, providing valuable cost management and tax benefits for both employers and employees. If you’d like to look deeper into these benefits or would like an estimate of the cost savings you’ll experience when switching to a traditional HRA, contact the health benefits experts at Flyte.