Navigating Health Reimbursement Accounts Like a Pro

Most individuals find themselves scratching their heads while trying to figure out Health Reimbursement Accounts (HRAs). They can be tricky to master, but they do not have to be complicated. With a clear understanding, individuals can harness its benefits seamlessly. HRAs empower individuals to effectively manage their medical costs. Read on to learn how it works.

What Are Health Reimbursement Accounts (HRAs)?

Health Reimbursement Accounts (HRAs) are company-funded accounts designed to reimburse employees for eligible medical expenses. Each year, companies contribute a certain amount that employees can use to pay for medical costs.

HRAs are notional accounts, meaning the funds are not physically in the account. Instead, they represent the company’s commitment to reimburse a certain amount. Employees pay for eligible expenses upfront, then get refunds by submitting claims to their HRA provider. The good news is that employees can use HRAs to cover medical expenses for their families. They can also carry over any unused funds to the following plan year.

Companies set the specifics of the HRA policy, such as contribution amounts, qualified expenses, and rollover rules. Employees must review their company's HRA policy to understand its coverage and how it works. HRAs provide employees with financial assistance for medical costs, enabling them to focus on other important matters.

Types of Health Reimbursement Accounts

Health Reimbursement Accounts (HRAs) have various forms designed to cater to individual needs. Here are the types of HRAs available:

1. Health Savings Accounts (HSAs)

   HSAs allow employees to contribute pre-tax amounts for eligible medical expenses. They can roll over any unused funds to the following plan year. HSAs, however, require employees to enroll in a high-deductible health plan (HDHP) before they can use it. Employees can use HSA funds for expenses like doctor visits, hospital stays, medications, dental care, and vision care.

2. Flexible Spending Accounts (FSAs)

   FSAs provide tax-advantaged funds for medical costs. However, the employees must utilize the funds within the plan year, as it follows the “use it or lose it” principle. They can use FSAs funds for the same expenses as HSAs. Other companies offer limited FSAs that rollover up to $500 to the following year.

3. Health Reimbursement Arrangements (HRAs)

   These are company-funded accounts used to reimburse employees for medical costs. For this type of account, employees can carry over any unused funds from year to year. Companies determine the expenses eligible for reimbursement.

   With these options available, employees can choose the right HRA that suits their needs. Understanding the differences between these health reimbursement accounts is key to navigating them like a pro.

   

Benefits of HRAs for Companies and Employees

Health Reimbursement Accounts offer diverse benefits for both companies and employees. For companies, HRAs provide tax advantages and more affordable ways to offer health benefits. Companies can contribute pre-tax amounts to employees’ HRAs, reducing taxable income. HRAs also give companies greater control and flexibility over health benefit costs.

For employees, HRAs mean lower medical expenses. They can use the funds provided by their company to pay for insurance premiums, copays, deductibles, and other medical bills. Health Reimbursement Accounts provide employees with increased control over how they spend the funds. By allowing unused funds to rollover from year to year, HRAs enable balances to accrue over time. This gives employees a financial cushion for larger medical costs in the future.

Briefly, Health Reimbursement Accounts benefit both companies and employees. Companies gain tax and cost benefits, while employees receive aid for medical costs.

Limitations of Health Reimbursement Accounts

While Health Reimbursement Accounts offer diverse benefits, there are limitations to consider. Employees can only use the HRA funds for qualified medical expenses as defined by the Internal Revenue Services. Expenses for cosmetic surgery or gym memberships typically do not qualify.

Employees must utilize the deposited HRA funds within a certain time period. Health Reimbursement Accounts forfeit any unused amount by the end of the plan year. Other plans, however, allow a rollover of up to $500, but any amount over that expires. It is best for employees to estimate their medical costs for the year to not overfund the account.

When an employee leaves or faces termination, the HRA forfeits any remaining funds. The funds belong to the company, and employees cannot take the money with them. For this reason, HRAs typically do not make sense for short-term or temporary employees.

While HRAs can be a valuable tool, it is vital for both companies and employees to understand their limitations. With careful planning, HRAs can help offset medical costs without too much risk of forfeiting unused funds.

How to Use HRAs: Reimbursements, Contributions, and More

To get the most out of their HRA, it is crucial for employees to understand how their accounts work. Either companies, employees, or both can make contributions to health reimbursement accounts. Employees can use HRAs for the following:

• Reimbursements

After incurring medical costs, employees need to submit a claim to get reimbursed. This typically involves filling out a claims form and providing documents to verify the charges. Most Health Reimbursement Accounts allow employees to submit claims manually or electronically via an online portal. Reimbursements are usually issued within 2 to 3 weeks after processing the claim.

• Remaining Balances

Employees can rollover any unused funds left in the HRA to the following year. However, other plans may cap the rollover amount or require the forfeiture of unused funds after a set period. Employees must check with their specific Health Reimbursement Accounts provider to understand its rollover and forfeiture policies.

• Investment Options

Other Health Reimbursement Accounts give employees the option to invest a portion of their balance to produce tax-free earnings. Employees need to choose how and where to allocate their HRA funds across the investment options available. This can include stocks, bonds, mutual funds, and interest-bearing accounts. The downside is that the HRA balance decreases in value if the investments do not perform well. But the upside is the opportunity for the balance to accumulate tax-free over time through investment returns.