So what, exactly, is an HRA? Well, it’s a tax-advantaged Health Reimbursement Arrangement that allows an employer to reimburse employees (and/or their dependents) for some of their medical expenses. In this regard, it’s similar to the Health Savings Account (HSA), because it means that the employer can help the employee by cushioning the blow on a major claim. And, the same kinds of expenses that are approved for reimbursement on an HSA plan are okay for HRA, as well.
So what’s the difference? It really comes down to who contributes the money for reimbursement, and who ultimately owns that money.
In an HSA, either the employer or the employee (or both) can contribute to the “rainy day” account, but – no matter what – the employee “owns” whatever money is in that account, and is free to spend it however he chooses (subject, of course, to potential wrist-slapping if the funds are misused). Whoever makes the contribution gets the tax deduction (again, could be both). The type of insurance plan that can be used with an HSA is dictated by the government, so there’s not much flexibility in plan design. And, of course, HSA’s are available to both groups and individuals.
With an HRA, though, only the employer can contribute the funds. The employee doesn’t ever own them, because it’s not an “account,” it’s an “arrangement.” That’s not splitting hairs, because the point is that the employer decides (“arranges”) what claims will be reimbursed, as opposed to just dumping money into some bank account. HRA’s are available only to groups, not individual plans, and offer a lot more flexibility. For one thing, there’s no governmental regulation over what kind of plan is used, so an employer has more choices. For another, HSA plans require that, if the employer is making a contribution, he has to contribute like amounts to everyone in the pan. There are no such rules for HRA’s.
In Part Three, we’ll look “under the hood,” to see how each plan works in real life.