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Pros & Cons of a Health Reimbursement Plan

Health Reimbursement Arrangements (HRAs) offer both pros and cons to companies and their employees. When tied to a high-deductible insurance plan, HRAs allow employers and their workers to save on health care premiums. The employer funds the account and receives tax savings while the employee uses the plan to offset medical costs not covered by insurance. Cons for employees include the fact that the employer -- not the employee -- owns the account and makes the rules governing reimbursements. For employers, following complex rules and provisions can be a downside to HRAs.

  1. Pros: Employee

    • HRAs save employees money in several ways. If an employee pays for part of his medical insurance, those payments will decrease with a higher deductible plan. HRAs provide a way to pay for medical costs until the insurance "kicks in" after the deductible. The money funding the account can be excluded from the employee's gross income and reimbursements are tax free for approved medical costs. Unused funds can be rolled over to the next year, if the employer sets it up that way. Employees do not have to be covered by a health plan to participate and can be reimbursed for any health plan, allowing them to find health insurance that works best for their families.

    Cons: Employee

    • Unlike health saving accounts, which are employee owned, employers control HRA accounts. They decide which medical costs will be covered, such as emergency room visits or no prescription reimbursement. The employers determine if unused funds will roll over to the next year, and they can decide not to offer the plan at all. If an employee leaves her job, the HRA funds don't go with her.

    Pros: Employer

    • By offering an HRA tied to a high-deductible health plan, employers save money on insurance premiums. Part of those savings can be used to fund the HRA so employees do not have any additional financial burden. The employer pays the reimbursements as they occur, and the employer's contributions are tax deductible. With HRAs, employers know their maximum health care benefit expense and employees learn to be more discerning in spending their health care funds, which helps control costs. Employers benefit from the plan's flexibility, which allows them to set the terms for the fund such as the amount, expenses covered and yearly roll-over amount, if any.

    Cons: Employer

    • With HRAs, employers must follow precise rules including COBRA, ERISA and HIPAA provisions. HRA reimbursements to employees of Medicare age, must follow Medicare Secondary Payer reporting requirements. HRAs require a third-party administrator to pay claims and a certified public accountant who understands medical tax laws to get the best tax advantages. Employers should ensure that employees fully understand the terms of the plan.

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