Health reimbursement accounts (HRAs) are a lot like other tax advantaged accounts like IRAs or a 401k, but it comes with a twist. Money is contributed to the plan to help offset qualified medical costs. The difference is that money can be withdrawn from the account at any time for a medical expense without penalty and that employers are required to fully fund them. A third party then administrates the plan.
As with any tax advantaged program, there are certain benefits and disadvantages that must be weighed to determine if it is the right benefit to provide.
The Pros of HRAs
1. Reimbursements are tax deductible.
Any reimbursements that go to an employee for a qualified medical expense becomes a tax deductible expense. This means that the cost of providing health care coverage can become close to a neutral cost for an employer. With rising premiums happening every year, sometimes by double digit percentage points, that’s a big expense to reduce on the books.
2. Most HRAs allow unused funds to be rolled over year to year.
Unlike other health savings programs, the funds that remain unused in an HRA can often be transferred to the next year. This means employees aren’t forced to seek out care options that they may not need just so they can spend the money that is in their account instead of losing it.
3. Employers know what their maximum expenses will be.
There is no uncertainty when it comes to the costs of an HRA. The employer will always know what their maximum expense will be so that budgeting can be more accurate. If savings occur, then that’s just extra money that helps the bottom line at the end of the year. Add in the savings over a traditional health care insurance premium and employers may save up to 50% on their overall health care costs.
4. Funds never become the property of the employee.
Employees are able to file claims to the HRA in order to receive funding for qualifying medical procedures. At no point in time do they have ownership of the money or can spend it in a way that they personally desire. The money is always under the control of the employer, through their third party administrator, so that no spending waste occurs.
5. Most HRA reimbursements are not considered income.
Employees save on medical expenses through the use of pre-tax money and the reimbursements that they receive are often excluded from their overall salary. Multiple health care plans are available, including PPOs and HMOs, and reimbursements can sometimes even be used to cover supplemental insurance.
The Cons of HRAs
1. There are several rules and restrictions that are in place.
It can be difficult to navigate an HRA plan, especially if a business is implementing one for the first time. Having a third party administrator helps matters quite a lot, but not every administrator is created equally. Some may not take time to answer questions. Others may be slow on their administration tasks. That’s why taking time to research this subject before implementing the benefit is so important.
2. It is not available to people who are self-employed.
People who work for themselves do not have access to an HRA even though they are responsible for the employer side of taxes in matters like Social Security or Medicare. This means they have no access to the same benefits.
3. Leaving an employer means leaving HRA funds.
Employers get to set the rules for these funds, which means the money isn’t going to transfer should an employee leave their job. In addition, employers also get to determine what qualifies as a medical expense that will be covered. That can mean prescription drugs costs or certain medical procedures may not be covered.
4. Not every employer receives monetary benefits and not every employee can afford payments.
To receive a reimbursement, employees must show that they have paid their insurance premiums and have a qualifying medical bill. For employers, not every business owner will experience the tax advantages. Some small businesses owners may actually need to report their reimbursements as income that is taxable.
The health reimbursement account pros and cons show that change can sometimes be hard, but it can also sometimes be highly beneficial. It isn’t for everyone, however, so carefully evaluate each key point to determine if an HRA plan could save you and your employees money.