Health Insurance

What Happens To Unused HRA Funds

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 7 minute read

Health reimbursement arrangements (HRAs) offer a tax-free method of paying for healthcare expenses, regardless of whether you work for a large or small organization.

As one of the most sought-after benefits, HRAs are designed to compensate employees for healthcare expenses such as insurance premiums, copayments, prescriptions, and over-the-counter medications.

Everything you need to know about HRA plans, including how they function, how they differ from HSAs and FSAs, and what you can do with the money, is laid out in this comprehensive guide.

What Exactly Is an HRA (Health Reimbursement Arrangement)?

Health reimbursement arrangements, often known as health reimbursement accounts, are accounts established by employers to help employees and their covered dependents pay for medical expenses paid out of pocket. 

Copayments, deductibles, and prescription drugs are all covered by HRAs in addition to what you receive from your employer’s health insurance plan.

If you have medical expenses that aren’t covered by your health insurance, an HRA plan might be a helpful financial tool. As a perk of working for the company, your employer will reimburse you with money that is not subject to taxes.

How an HRA Performs

Let’s say your youngster is ill and needs medication. When there is no generic equivalent, the high cost of the brand-name drug’s copayment can be shocking. Subsequently, you have to make some changes to your monthly budget as a result of the high out-of-pocket costs.

The good news is that you can get your money back by filing a claim with your HRA and waiting for the reimbursement cheque to arrive in the mail.

Human resources accounts (HRAs) are set up by companies so that employees and their families can get financial help with certain healthcare expenses. Only the employer can contribute to an employee’s HRA; workers have no say in how much is set aside.

Your HRA contributions are set annually by your company if one is participating. The Internal Revenue Service mandates that all workers have access to the same total amount of HRA contributions. Fortunately, any money left in an account at the end of the year will be carried over to the next.

Kinds of HRAs

Health reimbursement agreements come in three different flavors. Depending on the circumstances of your employment, you may have access to several kinds.

The Qualified Small Employer HRA (QSEHRA)

Qualified small-employer health reimbursement arrangements (also known as small-business HRAs) can be established by companies with less than 50 full-time employees.

Employer-provided medical benefits are not required for these establishments. If an organization does not provide a health insurance plan, its staff members will need to shop for coverage on either a federal or state exchange.

Your health reimbursement account (HRA) at your small business can be used to pay for medical insurance premiums or reimburse you for out-of-pocket medical expenses.

Contributions to a small business HRA are capped by the IRS. This sum is adjusted annually for inflation. In 2022, for instance, the IRS limited employer contributions to a maximum of $5,450 for single workers and $11,050 for those with dependents.

The Individual Coverage HRA (ICHRA)

Some companies may not offer health insurance to their workers but are ready to pay a portion of the premiums for their workers. If your company doesn’t offer a health insurance plan for workers, an HRA can help you afford the costs of private coverage.

With the advent of individual coverage HRAs in 2020, small businesses now have a new tool for redistributing tax-free funds for health insurance. 

Consequently, you can use your HRA money to purchase health insurance either through HealthCare.gov, a state insurance exchange, or a commercial insurance company. Employees were not allowed to use HRA funds for their own health insurance premiums under the old guidelines.

The Medicare Part A, Part B, and Part C (Medicare Advantage) premiums for those 65 and up can be paid from the individual HRA balance. Your employer may ask for proof of Medicare coverage each time you submit a claim to your HRA if you are still actively employed and receiving Medicare benefits.

The Group Coverage HRA (GCHRA)

Employers can save a lot of money by switching to high-deductible health plans (HDHPs) instead of more expensive standard group health insurance. However, until the deductible is met—which might include several thousand dollars—employees are responsible for paying for any medical expenses out of pocket.

Because of this, several businesses provide HRAs for employees to use alongside HDHPs. The group coverage HRA helps bridge the gap between the high deductible of an HDHP and the employee’s actual out-of-pocket medical costs.

HRA vs. HSA vs. FSA

Health savings accounts (HSAs) and flexible spending accounts (FSAs) are two more programs that can be used in conjunction with health insurance coverage (FSAs). Although most companies operate on a reimbursement basis, some also provide employees with debit cards for immediate access to funds.

The Health Savings Account (HSA) is unlike other types of insurance since it follows you when you change jobs, but it is only compatible with high-deductible health plans (HDHPs). 

Despite the need for outright financial contributions, your HSA balance is ultimately in your hands and can be invested in whatever you see fit, be it equities, bonds, or mutual funds.

The FSA is a type of HRA. Employees can contribute through a pretax deduction from their pay, but they must be used within a certain time frame or be lost forever. There are key distinctions between HRAs, HSAs, and FSAs that may influence your decision. 

Among them are:

  • Who funds it
  • How much money can be added annually (individuals; families)
  • Whether the employee pays taxes
  • What type of health plans it works with
  • Whether you can use it to pay health insurance premiums
  • Whether unused funds roll over each year
  • What happens to the funds when you leave the employer (portability)

There are advantages and disadvantages to all three types of accounts when compared to one another: HRAs, HSAs, and FSAs. If you have the option of more than one but can only afford one, weigh the advantages and disadvantages of each carefully.

HRAHSAFSA
Funding SourceEmployerEmployer or workerEmployer or worker
Annual Cap (2022)Unlimited on most$3,650; $7,300$2,850
Employee Taxes NoNo No
Plan TypeAny HDHPAny
Premium CoverageYesNoNot usually
RolloverYesYesSometimes
PortableNoYesNo

The Pros & Cons of HRAs

A health reimbursement arrangement (HRA) is a useful tool for controlling healthcare expenditures. HRAs provide employees with essentially unlimited spending options for what amounts to free money. 

In addition, businesses benefit since they can write off the whole amount of employees’ tax-free reimbursement claims. However, there are pros and cons that you should think about.

Pros

There are many good elements to HRAs for companies, including the fact that they are tax-free offers. However, HRAs also offer substantial pros for workers.

  1. Employee Contributions Are Exempt from Income Tax. The money an employer puts into an HRA is not considered taxable income to the employee.
  2. Pay No Tax On Withdrawals. When employees use their health savings account to pay for medically necessary expenses, they do not have to pay income tax on the money they withdraw.
  3. Every year, the remaining balance is carried over. The funds in your HRA will remain available for use in subsequent years; they will not expire. If you had excellent health one year but suddenly became ill in the next, you can use the money in your HRA surplus to cover the costs of any necessary emergency visits, medications, or hospitalization.
  4. You Have Many Options for Spending HRA Funds. The HRA has the most extensive list of allowable medical costs. That includes not only medical costs but also dental and optical costs.

Cons

Despite their benefits, HRAs do not provide foolproof coverage for workers’ medical expenses.

  1. The HRA is Not a Substitute for Health Insurance. It is not possible to use an HRA if you decide not to purchase health insurance.
  2. The Types of Healthcare Costs That Can Be Reimbursed Are Set By Your Specific Plan. There may be benefits included in your HRA plan that aren’t offered by competitors. Get a list from your HRA manager.
  3. If you leave your job, you will no longer have access to your HRA funds. All money in your HRA account will be forfeited if you resign from your position with the company. So, if you’re making a move, use up all your HRA money before you leave.
  4. The Amount of Your Contribution Will Be Set by Your Company. Some businesses choose group plans with lower premiums, but those that shift more of the cost onto workers. The HRA may not be able to adequately protect the employee if the contribution level is too low.
  5. Personnel is unable to make HRA contributions. You will not be able to fund your own HRA with salary reductions. Healthcare FSAs and Flexible Spending Accounts are the only two types of accounts that allow employees to contribute.

Bottom Line

When an employer offers health reimbursement, they are essentially giving you free money to pay for medical expenses. You can keep the HRA money without paying taxes on it, while they can write it off on their taxes.

A health savings account (HSA) can be easily incorporated into an existing health insurance strategy. Let’s say you went to the doctor and got a bill for $100, two weeks after your visit. You would have to fork over $100 out of pocket before your HRA program would repay you for it.

It’s also important to remember that each company has its own list of acceptable costs. Yet, of the three health savings accounts available, HRAs offer the widest range of eligible expenses for reimbursement.

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