A health reimbursement account is an employer-funded account used to cover employee health expenses, often used instead of group health insurance or to help with high-deductible plans. Employers must create a plan outlining what expenses can be reimbursed, and there are tax benefits for both employers and employees. Employees have control over their healthcare expenses, and the funds are not taxable in most cases. HRAs can also help control healthcare costs.
A health reimbursement account is an account to which an employer can contribute money for an employee’s health expenses. Health reimbursement accounts are also called health reimbursement arrangements. They are often used instead of providing group health insurance to employees or to help defray the costs associated with a high-deductible health plan. In general, special tax rules apply to a health reimbursement account, which can benefit both the employer and the employee.
Before establishing a health reimbursement account, an employer must generally first create a plan that outlines the types of expenses that can be reimbursed. For example, companies that use these accounts instead of offering group health insurance may limit reimbursements to the cost of private health insurance premiums. In cases where the company offers a high-deductible health plan, it can limit reimbursements to only charges that go towards meeting the deductible. Companies may also choose, in some cases, to allow employees more freedom and set few limits on HRA use beyond those required by law.
When the reimbursement plan has few restrictions on the types of expenses that can be reimbursed, it generally allows an employee more control over their health care. For example, an employee with this type of plan may choose to use the funds to pay private health insurance premiums, while another employee may choose to forego insurance and use the funds to pay medical bills as they arise. Some may find this preferable to a more restrictive approach.
Employers have no limits on the amount of money that is contributed to an employee’s health reimbursement account. However, only the employer can contribute. An employee may not make additional contributions of their own money or accept a reduction in salary for additional contributions, nor may a self-employed individual create a health reimbursement account. However, employees and the self-employed may have access to a similar plan, such as a Health Savings Account or Archer MSA (Medical Savings Account).
One of the often-touted benefits of HRAs is that the money deposited is not taxable in most cases. For employees, this means that refunds are generally not taxable as long as they are used for covered expenses. Funds contributed to the health reimbursement account are also generally not included in the employee’s gross income. Similarly, employers can often qualify for tax deductions on the amount contributed to these accounts.
From the perspective of the health care industry, HRAs can offer the additional benefit of helping to control costs. For example, some believe that when employees must first pay expenses and then be reimbursed, he or she is more likely to make savings decisions. Such decisions may include, for example, going to the doctor during regular business hours, instead of using the emergency room.
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