When you sign up for health insurance during open enrollment at work, you may find your employer offers a healthcare reimbursement account, or HRA. HRAs allow your employer to help you cover some of the care costs you'd otherwise need to pay out-of-pocket. If you have a HRA, or are thinking about signing up for a plan that offers one, here's what you need to know.
What is a healthcare reimbursement account (HRA)?
A healthcare reimbursement account is an account that your employer contributes a set amount of money to. The money is used to pay for medical care you'd otherwise need to pay for out-of-pocket. You are not taxed on the money your employer puts in your HRA.
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Say you signed up for employer-sponsored health insurance that had a deductible and co-insurance costs and you received medical care that cost you $1,500 out-of-pocket. If your employer puts $750 into an HRA for you, the HRA might pay the first $750 of those out-of-pocket costs for you. You pay the remaining $750 for the care you received.
The circumstances when the HRA pays out depends on how your plan is structured.
For some plans, the HRA pays as soon as you incur out-of-pocket expenses and continues paying until funds are gone. Then, you're responsible for covering additional coinsurance or other out-of-pocket costs. That's like the example described above.
In other plans, you pay first until you've spent a set amount. Then, your employer pays until you exhaust your HSA funds. If you had this type of plan and incurred $1,500 in out-of-pocket expenses, your employer might require you to pay the first $500. Then, the employer would pay the next $750 and you'd pay the remaining $250.
Health reimbursement accounts vs. health savings accounts
It's important not to confuse HRAs with health savings accounts (HSAs), although both types of accounts help you offset the costs of out-of-pocket medical expenses.
HRAs are accounts that only your employer can contribute to. It's up to your employer whether the funds should roll over from year to year if you don't use them all. And, if you leave your job, you can't take the HRA funds with you to your new workplace.
Health savings accounts (HSAs), on the other hand, are accounts that either you or your employer can contribute to, or both. You are eligible to contribute to a HSA only if you have a qualifying high-deductible health plan (HDHP). Your employer may offer a high-deductible health plan with an HSA as a workplace benefit. Or, if you sign up for individual health insurance coverage and choose a HDHP, you can open a HSA with a brokerage firm or other financial institution.
You can personally put money into your HSA, up to annual contribution limits. In 2019, you could contribute up to $3,500 if you have an individual plan or $7,000 if you have family coverage. Contributions you make are made with pre-tax funds.
When you have a HSA, you can leave the money invested from year to year and it will grow tax-free if you don't take it out to pay for healthcare expenses. And, the HSA is yours to keep, even if you leave your job. However, if you withdraw funds for reasons other than healthcare costs and you're under 65, you'll pay a tax penalty.
Many people use HSAs as a way to save for healthcare costs you'll incur later in life, or as a retirement savings account, because funds can be taken out for any reason once you're 65 or older (although if you take money out after age 65 that's not for health expenses, you're taxed on the withdrawal as ordinary income.)
What can HRA funds be used for?
HRA funds can only be used for qualifying healthcare expenses. Your employer sets the rules for determining if a healthcare expense can be paid for with HRA funds or not. Some plans use the definition of medical expenses in IRS Publication 502 but employers are free to place additional restrictions or limitations. Some employers also restrict coverage only to employees, so dependents aren't covered.
In most cases, when you have a covered medical service and your doctor bills your insurance, HRA funds will be paid out automatically to cover your out-of-pocket costs. This will reduce the amount you owe to the doctor after your claim is processed and may leave you owing nothing. And, if you pay out-of-pocket expenses, you can submit forms to the HRA to get reimbursed from HRA funds.
An HRA will help keep expenses down
The bottom line: If your employer offers a HRA, it will help you to keep out-of-pocket costs down because funds your employer contributes to the account cover some of what you'd normally have to pay. But you need to know your plan rules for what a HRA covers. And, remember, you can't make contributions to this account -- unlike a HSA -- and if you leave your job, you can't take unused funds with you.