Employers keep searching for innovative ways that will allow them to manage their health care costs while keeping employees happy. Heath Reimbursement Arrangements (HRA) are Defined Contribution (DC) health plans designed to do just that. HRAs were first implemented in 1955, but didn't become popular until they were refined by the IRS in 2002 to allow employers to adopt new health care plans with a greater number of patient-directed features. HRAs are one of the fastest growing health care insurance strategies being offered by employers today. They are sometimes called Section 125 plans, and employers may offer them in addition to, or in place of, health insurance.
HRAs are among the most flexible insurance products on the market. These federally approved accounts may be tied to high deductible insurance plans, or they may be offered on their own. HRAs allow funds to be placed in a special account to reimburse employees for out-of-pocket medical expenses that they may incur. HRAs are similar to Flexible Spending Accounts (FSA); however, while an FSA is an add-on to your already existing medical coverage, an HRA is your medical coverage.
There are some key differences that separate HRAs from FSAs. First of all, HRA funds are employer-funded. By definition, employees cannot be made to fund HRAs in any way. Also, there is no risk of forfeiting unused funds. This was a problem with FSA accounts prior to 2002. Even today, if FSA funds are not used within a specified period (two years, two months, and fifteen days from the end
of that benefit year), the unused funds can be lost. Unused HRA funds roll over on a yearly basis, and if left unused, continue to accrue in size until required. HRA premiums and reimbursements can be modified on a yearly basis, and insurance companies can be switched at any time during the year. HRA funds can be used to pay for any tax-deductible medical expense.
An HRA offers certain advantages to both employers and employees. An employer can save tens of thousands of dollars annually by offering an HRA. Funds placed into employee HRA accounts, along with premium fees and employee reimbursements, are tax-deductible. HRA accounts force employees to be more discriminating with the way in which they use their health care funds, which helps employers to control costs.
By choosing a high deductible health insurance plan, the employer is able to reduce premium payments and save money. The HRA is then established to cover the difference between the former deductible and the new high deductible amount. Ultimately, by coupling an HRA with a high deductible health insurance plan, employers are able to reduce their health care costs in a way which keeps employees happy and places no extra financial burden upon the employees.
Employees benefit because they are able to enjoy the same level of health care coverage, without having to assume greater financial responsibility. They also have greater control with this system, and are able to use the health care services of their choosing, without the limitations associated with managed care programs.