Health Reimbursement Arrangement

What Is an HRA?

Health Reimbursement Arrangements (HRAs) are Internal Revenue Service sanctioned programs that allow an employer to set aside funds to reimburse eligible employees for covered medical expenses. The use of an HRA can produce tax advantages and lower premium outlays.

Common Types

“Gap” HRA

EXAMPLE:  An employer increases the annual deductible on his plan from $1000 to $3500 in order to achieve considerable savings.  Since the employees are accustomed to paying just $1000, the employer agrees to use the savings to “cover the gap” the employee may experience.   In other words, the employee would pay the first $1000 and the employer would reimburse the employee for covered expenses from $1001 to $3500.  The employer benefits from reduced insurance costs, but the employees are also protected because they pay no additional money out.  This is the most straightforward and common type of HRA.

“Sandwich” HRA

EXAMPLE:  In order to combat a significant renewal increase, an employer increases the annual deductible on his plan from $2500 to $5000.  Even with the change in benefits, the employees will still have to pick up additional risk.   As an effort to keep the benefits as close to possible for the employees, he only asks that they pay an additional $500 a year which increases their total responsibility to $3000. 

In this scenario, the contributions would be divided in a “sandwich” type fashion such as:  Employee pays first $2000, employer pays next $2000, and the final $1000 would be paid by the employee.   Both the employer and the employee benefit from lower monthly premiums and neither party is guaranteed to have to cover a full $5000 deductible. 

“Comprehensive Purpose” HRA

EXAMPLE:  Employer sets a defined monthly amount to reimburse employees as each employee decides.  Some employees may choose to spend the money on dental benefits, another spends theirs on an individual insurance policy, and another employee may let theirs accumulate for a future accident or illness.

This type is much more complex and less common.  It’s designed to cover any out-of-pocket medical, dental, vision, insurance premium expense, co-pays, and deductibles.  It does not have to be paired with a HDHP.

HRA Plan Design Flexibility
HRAs are flexible.   Limits can be set on types of services reimbursed by an HRA.  Amounts contributed to an HRA can be in a lump sum or in increments throughout the year, and can be rolled over from year to year.  This varies in many ways from H.S.A.s and F.S.A.s.