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Everything You Need to Know About Health Reimbursement Arrangements

In the world of employer-sponsored health benefits. In particular, confusion around the difference between an HRA and an HSA can cause serious issues. Here’s a closer look at HRAs and how they work.

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What do employer-sponsored health benefits and alphabet soup have in common? Not a ton, though both of them involve a lot of letters — from FSA and HSA to HDHP and PPO to HRA and ICHRA.

We’ll stop there. But seriously, we could do this all day.

The point? Healthcare is rife with acronyms. These abbreviations can look like gibberish to the untrained eye, and that confusion has real-world consequences. During open enrollment, employees who can’t tell the difference between an HRA and an HSA, for instance, might end up selecting the wrong option.

Generally speaking, consumers confused about their health insurance options tend to do one of two things:

  • They purchase more coverage than they need.
  • They become underinsured. Although they have continuous employer-sponsored coverage, their out-of-pocket costs exceed their household income.

Either way, employees end up with health plans that don’t actually serve them. As an HR leader, you are their most accessible resource for all things health insurance. This means it’s your job to translate these endless acronyms into terms the average person can understand.

But we also understand that you might feel overwhelmed by that prospect. It’s OK. We’ve got your back. This blog post will break down one of the most common healthcare acronyms: HRA.

What does HRA stand for?

HRA stands for health reimbursement arrangement.

What is an HRA account?

HRAs are employer-funded plans that reimburse employees for qualified medical expenses. In some cases, that includes insurance premiums.

How does an HRA work?

Employers set the amount given to employees based on their classification (full time, part time, seasonal, etc.). Those amounts can vary by classification, but they must stay the same across any given classification. Every full-time employee must receive the same amount, though an employer can provide its part-time employees with a different amount.

Imagine, for instance, that you offer a health plan with a $3,500 deductible to employees alongside a $1,000 HRA. One of your employees — we’ll call her Jean — has $1,400 in medical expenses. Jean decides to pay $400 of the medical bill out of pocket, and she uses the $1,000 in her HRA to cover the remainder.

What’s the difference between an HRA and an HSA?

It’s easy to confuse HRAs and HSAs due to their similar acronyms. While they’re both tools for managing healthcare expenses, there are some key differences.

First and foremost, HRAs are owned and funded by employers. They’re compatible with any type of group health plan, but most do not pay interest or allow individual employees to contribute. However, they do offer tax benefits: Both employer contributions and employee reimbursements are tax-free. Those reimbursements are also excluded from an individual’s gross income.

Individual employees own health savings accounts, which are tax-advantaged accounts that workers can contribute to if they’re on a high-deductible health plan. An employer can contribute to an employee’s HSA — some companies even match employee contributions — but most HSA contributions come directly from employees. Contributions from employees come via pretax payroll deductions, which lowers an individual’s overall tax obligation.

Can you have an HRA and HSA?

Employees can have HRAs and HSAs simultaneously, but only under specific circumstances. For example, HSAs are only compatible with HDHPs — and HRAs must be incorporated into a group health plan.

Do HRAs have maximum contribution limits?

Unlike HSAs, which have contribution limits, most HRAs have no restrictions on contributions. Employers decide how much they want to give their employees each year.

Does an HRA roll over?

It depends. Employers can set their own year-to-year rollover rules. Some companies embrace a “use it or lose it” mentality, while others allow their employees to keep any unused funds in the HRA for the following year. And because HRAs are owned by employers, employees cannot take any funds with them if they leave the company.

Let’s return to our earlier example to illustrate. Imagine you have another employee — we’ll call him John — who has $700 in medical expenses. John uses the first $700 of his $1,000 in HRA funds to cover the cost of this expense, but he has no additional qualified expenses for that year. If you allow your employees to roll over funds, John can retain that $300 in HRA funds for next year. If John decides to leave the company before then, however, he forfeits the $300 back to you.

OK. But what are ICHRAs?

We’re glad you asked! ICHRA stands for individual coverage health reimbursement arrangement (typically pronounced “ik-ruh”). As the name would imply, ICHRA plans are similar to HRAs. But instead of offering group health insurance, an ICHRA would see you give your employees a defined contribution to buy their own health insurance coverage. As with an HRA, the contribution is tax-free for employees and tax-deductible for employers. Employees can also use funds from an ICHRA to pay for qualified health expenses.

Filling the Gap

HRAs and HSAs are incredible resources for employees during a time when healthcare costs continue to rise, but they aren’t a cure-all. When employees have drained their HRA funds but haven’t met their plan’s deductible, they might be tempted by financially unhealthy ways of paying their medical bills. Thankfully, a solution like Paytient can plug any gaps and encourage employees to get the care they need without financial harm.

What’s more, Paytient is more cost-effective for employers than HRAs. Think back to our hypothetical example. A company providing 50 employees with $1,000 each in HRA funds annually is looking at a $50,000 expense. In contrast, a $1,000 Paytient credit line only costs you a few dollars per month for every employee covered.

Luckily, these offerings aren’t mutually exclusive. We designed Paytient to pair with other health benefits, and a blended approach can deliver cost-effective results. Imagine you want to provide $2,000 of “coverage” for employees’ out-of-pocket expenses; rather than shell out $2,000 per employee annually, you could offer $1,000 in HRA funds and a $1,000 Paytient benefit — giving them $2,000 for care costs at a fraction of the price. To learn more about how Paytient works, click here.

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