Understanding Health Reimbursement Accounts - A Smart Way to Cover Medical Expenses
- Vish Raj
- Apr 4
- 4 min read
Healthcare costs can be a major burden, but a Health Reimbursement Account (HRA) can help reduce the financial strain. Many employers offer HRAs as a way to help employees cover medical expenses without dipping into their personal savings. But what exactly is an HRA, how does it work, and how can it benefit you? Let’s break it down in simple terms.
What is a Health Reimbursement Account (HRA)?
A Health Reimbursement Account (HRA) is an employer-funded account that helps employees pay for qualified medical expenses. The employer contributes money to the HRA, and employees can use these funds for healthcare costs such as doctor visits, prescription medications, and hospital bills.
Key Features of an HRA:
Employer-Funded: Only employers contribute to HRAs. Employees cannot add money to the account.
Tax-Free Benefits: The money in an HRA is tax-free, meaning employees do not pay taxes on the funds they receive for medical expenses.
Reimbursement-Based: Employees pay for medical expenses first and then get reimbursed from the HRA.
Flexible Coverage: HRAs can cover a variety of healthcare costs, depending on the employer’s plan.
Employers often consult experts in accounting and tax services in Fairfax to design HRAs that align with tax laws and employee benefits programs.
How Does an HRA Work?
HRAs are simple to use. Here’s how the process generally works:
Employer Sets Up the HRA: The employer decides how much money to contribute to the HRA each year.
Employee Incurs a Medical Expense: The employee pays for a qualified medical expense out of pocket, such as a doctor’s visit or prescription medication.
Employee Submits a Claim: The employee submits proof of the expense, such as a receipt or medical bill, to their employer or HRA administrator.
Employer Reimburses the Employee: If the expense qualifies under the HRA plan, the employer reimburses the employee using the HRA funds.
Unlike Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs), employees cannot withdraw money directly from an HRA. Instead, they must submit a claim for reimbursement.
What Can an HRA Cover?
The types of medical expenses an HRA can cover depend on the employer’s plan. However, most HRAs cover the following:
Doctor visits and copays
Prescription medications
Dental and vision care
Hospital stays and surgeries
Medical equipment (such as wheelchairs or hearing aids)
Mental health services
Physical therapy
Employers have flexibility in choosing what expenses are eligible for reimbursement. Employees should check with their HR department to understand their specific HRA coverage.
Benefits of an HRA
HRAs offer several advantages for both employees and employers:
For Employees:
✅ Reduced Out-of-Pocket Costs – Employees receive financial assistance for medical expenses, reducing their personal healthcare costs.
✅ Tax-Free Reimbursements – Employees do not have to pay taxes on the money they receive through an HRA.
✅ No Payroll Deductions – Since only the employer funds the HRA, employees do not have to worry about deductions from their paycheck.
For Employers:
✅ Cost Control – Employers can decide how much to contribute each year, helping them manage healthcare costs.
✅ Tax Savings – Employer contributions to HRAs are tax-deductible.
✅ Attractive Employee Benefit – Offering an HRA helps attract and retain employees by providing additional healthcare support.
Employers often work with professionals specializing in accounting and tax services in Fairfax to ensure they maximize tax benefits while offering a valuable employee benefit.
Types of HRAs
There are different types of HRAs, each designed for specific employer and employee needs.
1. Integrated HRA
This type of HRA is paired with a group health insurance plan. It helps employees cover out-of-pocket costs that their insurance does not fully cover.
2. Qualified Small Employer HRA (QSEHRA)
Small businesses (with fewer than 50 employees) can offer a QSEHRA to help employees pay for medical expenses or health insurance premiums. Employees can use this HRA even if they purchase their own health insurance.
3. Individual Coverage HRA (ICHRA)
An ICHRA allows employers to reimburse employees for health insurance premiums and medical expenses instead of offering a traditional group health plan.
4. Excepted Benefit HRA (EBHRA)
This type of HRA is offered alongside a group health plan and covers limited expenses such as dental, vision, or short-term insurance.
5. Retiree HRA
Some employers offer HRAs to retired employees to help them pay for medical expenses in retirement.
Each type of HRA has different rules, so employees should review their company’s plan to understand how it works.
HRA vs. HSA vs. FSA: What’s the Difference?
HRAs, Health Savings Accounts (HSAs), and Flexible Spending Accounts (FSAs) all help with medical expenses, but they have key differences:
HSAs and FSAs allow employees to contribute their own money, while HRAs are funded only by employers. Additionally, HSAs belong to the employee and stay with them even if they leave their job, while HRAs typically do not.
Are HRAs Right for You?
HRAs are a great option for employees who want additional help covering medical expenses. If your employer offers an HRA, here are some things to consider:
Review Your Plan: Understand what medical expenses are covered under your employer’s HRA.
Keep Your Receipts: You must provide proof of medical expenses to receive reimbursement.
Ask About Rollover Rules: Some employers allow unused HRA funds to roll over to the next year, while others do not.
Combine with Other Benefits: If you have an HRA and another health plan (like an HSA or FSA), find out how they work together.
For employers, HRAs are a flexible and tax-friendly way to support employees’ healthcare needs while controlling business costs.
Final Thoughts
A Health Reimbursement Account (HRA) is a smart way for employers to help employees manage healthcare costs. Since HRAs are employer-funded and tax-free, they provide financial relief for medical expenses without reducing employees’ paychecks.
If your employer offers an HRA, take the time to understand how it works and how it can benefit you. Whether you’re covering routine doctor visits, prescriptions, or unexpected medical bills, an HRA can make healthcare more affordable and accessible.
Would you like more guidance on HRAs and tax-advantaged healthcare options? Contact Raj & Associates CPA PC, a trusted Tax Advisor near Fairfax, for expert advice on employer-sponsored health benefits and tax-saving strategies!