A Health Reimbursement Arrangement is an account authorized under Section 105(h) of the Internal Revenue Code and further defined in 2002 by Revenue Ruling 2002-41 and notice 2002-45. An HRA is an employer-funded arrangement designed to reimburse employees and, in most cases, their spouses and dependents for certain medical expenses as outlined by the employer. Amounts in the employee’s HRA account that are not used to reimburse the employee during the coverage period may be carried over into subsequent coverage periods, provided the employer allows this provision.
Employers use HRAs as a means to offset the extra costs they ask employees to incur when they switch to a cost-savings group medical plan. The HRA fills the financial gap employees would have had to otherwise fill. The result? Employees don’t see the change you make in their health benefits plan as a financial loss. Better still, once employees start using the HRA, they quickly learn the cause and effect of their health care choices; the wiser the choices, the more money stays in their account. They learn the true cost of health care by creating a long-term contribution strategy.
Employers determine their risk tolerance based on the amount they choose to provide to employees participating in the HRA plan for that year. An employer could see the maximum savings of 100% if HRA funds are not fully utilized by the covered employee. By processing the deductible amounts, using the IRS Section 105 (HRA), combined with the normal health plan carrier’s discount contract will normally give the employee a 20% to 40% discount off of the retail cost of medical services they would not normally experience. If the employee utilization is within the national average, then the employer can expect to save 20% – 40% or more off of their current premium costs.