A Health Reimbursement Arrangement (HRA) is a program through which you reimburse your employees for eligible health-care expenses (as listed in IRC Sec. 213d). The HRA reimbursements your company provides are tax-free to the employee.

An HRA is usually combined with a high-deductible health insurance plan. The savings achieved by offering a high deductible instead of a low deductible can be used to fund the HRA. Because the premiums are lower, contributing employees will also be better able to afford coverage for themselves and their families.

The primary savings from an HRA comes from getting your employees to participate in controlling health care costs. When employees begin to spend the limited health care dollars in their HRA accounts, they’ll spend it like it is their money. The result will be more sensible purchases of health care.

• Each year, your company determines how much it will contribute to employees’ HRA accounts
• Employees can use the money to buy eligible health care services the company decides are needed
• What the employees don’t spend may stay in their HRA “Health Fund” accounts to use toward the following year’s medical expenses
• If an employee uses up his or her Health Fund (HRA account), he or she would need to pay for additional health care services until the insurance plan’s deductible has been met

• Employees are not allowed to contribute their own funds in an HRA
• Employees cannot take HRA funds as cash or cash equivalents (i.e., paying for insurance premiums instead)
• HRA contribution amounts may not be based upon the level of an employee’s compensation – however, a negative correlation to salary is acceptable
• HRA’s are subject to COBRA