18 HRA Account Pros and Cons

A Health Reimbursement Arrangement (HRA) provides workers with an employer-funded account that helps to pay for qualified medical expenses. It will provide help when employees or their covered dependents have a need that falls outside of their regular health plan. HRAs are typically compatible with all health insurance plans, and they are owned by the employer.

HRAs work like this. Your employer will set aside a fixed amount of money that is designated for your use each year. Unlike other health spending accounts that are available in the United States, only the employer is eligible to deposit money into the HRA. You receive the funds at the beginning of each year, and some plans allow for anything left over to roll over the next year.

You can pair an HRA with a flexible spending account (FSA) as well, although qualified expenses must be paid from the latter first up to the available balance. Then employees can use HRA funds for any additional qualifying medical expenses which fall outside of their plan. You can even use this account to reimburse yourself for over-the-counter items and many other common healthcare expenses that are out of pocket.

List of the Pros of an HRA Account

1. It is a tax-advantaged account for employers.
Although employees will not get to take advantage of this benefit, the employer contributions to the plan are 100% tax deductible. It is up to each company to determine how much they offer to the HRA account each year. They can plan ahead with this knowledge for their maximum expense to budget this benefit with accuracy. Since it is usually offered with a high-deductible health plan, both groups can benefit from the reduced premium costs while limiting initial out-of-pocket expenses.

2. There is a lot of flexibility with HRAs.
Because employers act as the sole contributor to the Health Reimbursement Arrangement and they function as the plan sponsor, employers have the ability to design a plan which suits the needs of their workforce. Employees benefit because they have an extra fund available to them for their qualified medical expenses. That makes it a lot easier to manage financial decisions on both ends of the spectrum because there is a lot of flexibility available in its design.

Unlike a health savings account (HSA), employees do not need to be enrolled in another healthcare plan to take full advantage of this benefit. If employers offer an HRA, then everyone can get involved with it.

3. It provides a low-risk experience for employers.
Employers are not expected to pay out anything on a covered expense through the HRA until after the employee files and claim and has it adjudicated. That process reduces the potential for benefit fraud, which means even more money is available to save each year. Although this places the responsibility on the employee to ensure that they receive what they are due for qualified expenses (and forces them to pay upfront while waiting for reimbursement), it can lower the financial liabilities for medical concerns when looking at a long-term budget.

4. This account is useful in the recruitment and retention of talent.
When employers can provide a well-rounded benefits package, then it helps to attract the best talent in their industry and retain them over a longer time. Offering the advantages of a Health Reimbursement Arrangement can make a package offer stand out from others that someone receives, helping to convince an applicant to accept your offer before someone else.

The most common way to structure this benefit is referred to as the “promise to pay” benefit. You can design the HRA to reimburse employees for their deductible expenses. If a qualifying expense occurs, then you can generate a reimbursement that covers their out-of-pocket costs up to a point. If you can keep expenses low, then this structure can save a significant amount of money.

5. It will lower the overall healthcare costs for the employee.
There is no doubt that paying for healthcare in the United States is a costly experience. When employers can combine a high-deductible health plan with an HRA, then lower premiums get taken out of the paycheck each month. Employees can use the funds from the Health Reimbursement Arrangement to pay for their co-insurance, co-payments, prescriptions, and deductibles to limit their out-of-pocket expenses as well. Since you can also offer an FSA with this account, additional uninsured expenses can receive coverage to reduce a worker’s financial risk.

6. HRAs do not impact the income of an employee.
When employers make a contribution to an HRA, then that is real money that you can use for your medical expenses. Some plans even give workers a debit card which allows them to access funds for qualified needs, and then the claim processes through from that process. Even though this is actual cash you get to spend, the contributions do not count toward your overall salary figures. Employees do not need to worry about their Health Reimbursement Arrangement funds pushing them into the next tax bracket.

The reimbursements that you receive as a worker are tax-free with this design as well. If your plan allows, then an unused balance can roll over to the following year to ensure that there is enough available to cover a potential emergency.

7. It encourages workers to pay attention to their health.
The presence of an HRA encourages employees to pay attention to their healthcare spending each year. Making wise decisions can help to stretch out their funds over a 12-month period to limit their out-of-pocket expenses without limiting their access to care. A Health Reimbursement Arrangement can sometimes encourage spending since it usually offers a framework where the money disappears at the end of the year, but it can also make people become more aware of their actual medical costs. That means this advantage works to prepare them for the potential financial challenges they might face when seeking care for a health-related issue.

8. Employers do not have restrictions on the amount of the contribution.
One reason to consider an HRA is that it allows employers to offer unlimited contributions to their workers. Although there are more regulatory concerns to follow if you get above $5,000, firms are not restricted to the $3,500/$7,000 maximums in place for a health savings account. The new QSEHRA (Qualified Small Employer HRA) permits up to $5,050 for single employees and $10,250 for families as well, although that is a different structure outside of the regular Health Reimbursement Arrangement.

9. Employers often recoup their contributions each year.
Unless the framework allows for a rollover, most employers do not incur a 100% financial responsibility when offering an HRA benefit. Most workers do not even spend half of what they receive each year as a benefit. Most firms can recoup at least 60% of this expense at the end of the year from an organization-wide standpoint, while some can go as high as 80%. That means workers can gain the full benefit if needed, but there is also a level of responsibility involved that avoids expenses when necessary.

10. HRAs are available with more plans compared to other tax-advantaged products.
HRAs are only offered if they can be integrated with a group health plan. You cannot have a stand-alone HRA unless they are limited to specific benefits or receive an exemption under the current healthcare laws. A product like an HSA is only available when there is a high-deductible health plan in place and another tax-advantaged option is not part of the benefits package.

Because of this structure, there are fewer eligibility restrictions to worry about when offering this benefit.

List of the Cons of an HRA Account

1. There is zero portability with the HRA system.
Every Health Reimbursement Arrangement is specific to the employer. Because it is solely funded by the organization providing this benefit, the employer owns the cash that is available for individual use until a qualifying claim works its way through the system. If a worker decides to leave the company or has their position terminated for some reason, then the funds in their HRA are left behind.

It is possible for an employer to provide a retirement HRA that allows former workers to use the funds after leaving the company, but this design is uncommon in the United States.

2. There is no standardization available in HRAs from employer-to-employer.
Although the flexibility of an HRA is an advantage for employers, it can be a significant advantage to works. When you leave one job for another, the rules for the Health Reimbursement Arrangement may be very different. Except for the HIPAA, COBRA, and ERISA mandatory requirements, the rules for access and spending can vary greatly between firms. You will need to confirm the details of this benefit with a potential employer before agreeing to a position to ensure that it can meet your needs.

3. If you are self-employed, then you do not get to participate in this program.
When you work as a self-employed individual, then you are not eligible to participate in a Health Reimbursement Arrangement. This rule applies even if you are an independent contractor working for an agency that offers this benefit to their employees. Spouses of people in this situation are eligible if they are a true employee and not jointly self-employed with their relationship.

Think of this disadvantage in this way: if you own a business, work as a freelancer, or do work as an IC, then you are generally ineligible for this plan. If you receive a regular paycheck as an employee for a business, then you are generally eligible for this potential benefit.

4. Workers can spend and leave without consequence with an HRA.
Because an HRA receives funding at the beginning of the year, employees have immediate access to the entire amount designated for them. It is possible for a worker to spend all of their funds immediately, and then decide to leave the company before completion of the year. If this benefit is a significant amount, then the employer could take a financial hit on this budget line since additional funding would be necessary at some point for the replacement that they eventually hire.

5. The rules regarding an HRA can be complex and challenging to follow.
One of the primary reasons why many employers choose to use a different type of reimbursement arrangement for healthcare expenses is that the rules involving an HRA are complex. There are numerous rules and provisions which dictate eligibility. Small business owners don’t have the time to administer the program, so they look for an easier alternative. Many of the firms that do offer this arrangement use third-party providers who specialize in this advantaged account, which means there is an additional cost to consider.

6. There can be a lot of paperwork for employees to fill out to receive benefits.
The standard reimbursement process with an HRA requires the worker to submit an Explanation of Benefits form from their insurance company to apply for the funds in their account. This paperwork often determines eligibility, so it is an essential part of the claims process. If you’re unsure of what the document says, then knowing if your expense is eligible can be a challenging process.

Employers may not realize that HRAs are a COBRA-eligible benefit, which means it must be offered to ex-employees if they decide to pay the premium. That means you’re stuck on the hook as an organization to reimburse the expenses of a former employee – no matter how they left your organization.

7. Extra reporting requirements can be part of the process as well.
When an organization provides $5,000 or more in their Health Reimbursement Arrangement, then it requires a Medicare Secondary Payor reporting process that is more costly to administer. It takes the disadvantage of the bureaucracy to another level thanks to the various requirements in place. That’s why you’ll see this benefit fall below that threshold in most organizations because the cost to offer more is offset by the administrative expenses necessary to manage the accounts.

8. HRAs which rollover can be challenging to eliminate.
When funded accounts roll over from year-to-year with an HRA, then it can be challenging to eliminate the full balance if participants continue to leave their funds in reserve. If you were to offer $4,000 per year to each worker, then there would be a handful of employees with $20,000 in their account after five years with the company. It always happens. That’s why most agencies decide to provide an annual benefit which employees can use, but if they don’t, then they lose it.

Conclusion of the HRA Pros and Cons

A Health Reimbursement Arrangement is an unfunded notional account owned by an employer. They are the only ones who can fund this benefit. There may be no limits to the amount of the contribution, but whatever is placed into the HRA is forfeited when a worker leaves the agency. It is more of an IOU than a tangible financial product, which means an employer doesn’t have a tangible financial liability until the worker submits a qualifying claim.

Some companies set up their HRA to function more like a health savings account, but that option is rare because of the financial liability involved. Reimbursements usually take time, require evidence, and even make the employee pay for the initial cost of care before following through on their promise to pay.

The pros and cons of a Health Reimbursement Arrangement (HRA) can help employers manage the health and wellness of their workers more effectively while employees can offset some of their unexpected medical expenses. It is not a perfect system or even 100% inclusionary, but it can provide some unique benefits in specific situations. If your employer offers an HRA, then consider these key points carefully to ensure that you can maximize this financial resource.