What Is a Healthcare Reimbursement Account?

A Healthcare Reimbursement Account (HRA) is an employer-sponsored health benefit for eligible medical expenses. Solely funded by the employer, employees do not contribute. HRAs provide financial support for healthcare costs, complementing an employee’s health insurance coverage and reducing out-of-pocket burdens.

Fundamental Characteristics of Healthcare Reimbursement Accounts

Healthcare Reimbursement Accounts operate on the principle of employer-only funding. Employers establish these plans and determine the amount of funds available to employees for medical expenses, with no contributions permitted from employees. The funds within an HRA remain the property of the employer, functioning as a promise of reimbursement rather than a pre-funded pool employees can access directly.

Employees typically pay for their eligible medical expenses out-of-pocket first and then submit a claim to the HRA for reimbursement. The employer retains ownership of the funds until a valid claim is approved and paid. HRAs are non-portable; if an employee leaves the company, any unused funds generally revert to the employer.

The handling of unused HRA funds at the end of a plan year varies based on the employer’s plan design. Some HRAs operate on a “use it or lose it” basis, while others allow for a full or partial carryover. Employers have discretion over these carryover rules. HRAs are commonly integrated with traditional health insurance plans, including high-deductible health plans, covering expenses like deductibles, copayments, and coinsurance.

Qualifying Expenses and Claim Submission

The types of expenses eligible for reimbursement through an HRA are determined by IRS guidelines (Section 213), though employers can further narrow this list. Eligible expenses generally include a wide range of medical, dental, and vision costs, such as deductibles, copayments, coinsurance, prescription medications, and sometimes health insurance premiums. Employees should consult their specific HRA plan documents to understand which expenses are covered, as plan designs can vary.

Employees must provide detailed documentation for incurred expenses. Required documentation typically includes an itemized receipt, an Explanation of Benefits (EOB) statement from their insurance carrier, or an invoice from the provider. This documentation must clearly show the provider’s name, the date the service was rendered, a description of the service or item, the patient’s name, and the amount paid. For prescription drugs, a pharmacy receipt or printout with the necessary details is generally required.

The process for submitting a claim usually involves an online portal provided by the HRA administrator or the submission of paper forms. After an employee submits the required documentation, the administrator reviews the claim for eligibility and completeness. Reimbursement typically occurs after the claim is approved, with funds being disbursed directly to the employee, often via direct deposit or check.

Tax Advantages of Healthcare Reimbursement Accounts

Healthcare Reimbursement Accounts offer notable tax benefits for both employees and employers. For employees, reimbursements received from an HRA for qualified medical expenses are generally excluded from their gross income. This means the money employees receive to cover their healthcare costs is tax-free, not subject to federal, state, or local income taxes, nor to payroll taxes.

For employers, contributions made to HRAs are typically tax-deductible as ordinary business expenses under IRS regulations. This deductibility reduces the employer’s taxable income. The funds contributed to HRAs and the reimbursements paid out are also generally exempt from payroll taxes, including Social Security and Medicare taxes. This dual tax advantage makes HRAs a cost-effective method for businesses to provide health benefits.