What Is a Health Reimbursement Account and How Does It Work?

A recent column presented information on Health Savings Accounts (HSAs) which allow HSA owners to pay their and their family’s qualified medical expenses in a tax-beneficial way, both currently and in the future including during retirement. Federal employees and retirees have access to HSAs in the Federal Employee Health Benefits (FEHB) program.

But there are several prerequisites an employees must meet in order to contribute to an HSA, one of which is to be enrolled in a high deductible health plan (HDHP). There are other qualifications in order to contribute to an HSA, including not being covered by any health insurance plan that is not an HDHP.

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For those employees who do not qualify for an HSA, but who are enrolled in an HDHP the employee will be offered enrollment in a Health Reimbursement Account (HRA). This column discusses what an HRA is and how HRAs work. HRAs are available to federal employees enrolled in an FEHB program sponsored HDHP but who do not qualify for an HSA.

An HRA is an employer-funded plan that reimburses employees and retirees allowable medical expenses and, in some cases, insurance premiums. Reimbursement dollars received by employees and generally tax-free.

What Is an HRA?

The general features of an HRA are:

(1) Tax-free withdrawals for qualified medical expenses; (2)Carryover of unused credits from year to year as long as the HRA owner remains in the same HDHP;

(3) Credits in an HRA do not earn interest;

(4) Credits in an HRA are forfeited if the HRA owner leaves federal service or switched FEHB health insurance plans, and

(5) An HRA may be administered by the employee’s HDHP.

Setting Up an HRA in the FEHB Program

In order to set up an HRA, a federal employee must enroll in an HDHP. This enrollment will usually take place during an FEHB  open season.  Depending on which HDHP an employee chooses, the HDHP may send the employee an enrollment questionnaire. The employee must complete the questionnaire and return it to the HDHP. The HDHP will then set up the fund and contribute deposits (“credits”) to the HRA owner for each month the HRA owner is enrolled. In most cases, HDHPs credit the full amount of “credits” at the beginning of the year.

How an HRA Works

Once the HRA has been funded with “credits,” the HRA owner can request reimbursement for actual medical expenses incurred up to that amount of a credit. However, an HRA is not an account. Employees cannot withdraw funds in advance and then use the funds to pay medical expenses. Instead, they must incur the expense first, pay the expense, and then be reimbursed from the HRA.

Unlike an HSA, an employee cannot contribute to an HRA. An employee who uses up all the allocated credits in the HRA before year-end. The employee will have to cover any subsequent health bills not covered by their HDHP either out-of-pocket or with funds from their healthcare flexible spending account (HCFSA) or from their HSA which they previously to in past years and there are leftovers HSA funds.

Advantages and Disadvantages of HRAs

HRAs can be used to pay for qualified medical expenses which include prescription medications, insulin, crutches, birth control pills, care from a psychologist or a psychiatrist, substance abuse treatment, and transportation costs incurred to get medical care. Employees can use the money in their HRAs to cover their spouse’s and dependents allowed medical, dental and vision expenses.

An HRA can result in savings for an HRA owner, a result of lower premiums via being enrolled in an HDHP and tax-free medical reimbursements. If the HRA owner retires and remains in his or her HDHP, then the HRA owner may continue to use and accumulate credits in the HRA. When the retired HRA owner enrolls in Medicare, then tax-free reimbursements for Medicare Part B and Medicare Part D monthly premiums can be requested.

Some disadvantages of HRA ownership include:

1. An HRA cannot be used for costs that are not deemed necessary, such as teeth whitening, funeral service or non-prescription medications.

2. Is set up by the HDHP, which decides how much money goes into the HRA.

3. The HRA owner cannot withdraw funds first and then pay expenses. The HRA owner must pay the expenses and then wait to get reimbursed, and

4. An HRA is not portable. An HRA owner who changes HDHP plans or leaves federal service will forfeit any funds remaining in the HRA. The HRA cannot be “cashed out.”

The Differences Between an HSA and an HRA

The following chart summarizes the differences between an HRA and an HSA. Note that both an HRA and an HRSA are associated with an HDHP.