NCPA - National Center for Policy Analysis

Health Reimbursement Arrangements

May 8, 2003

Consumer-driven health care has begun to restore patient power by allowing consumers to control a greater portion of their health care spending and directly experience the financial consequences of the decisions they make.

Health Reimbursement Arrangements (HRAs) are a type of personal account from which employees can pay directly for their medical care. Some of the characteristics of HRAs:

  • Funds can roll over each year and grow tax free.
  • Firms of any size can establish an HRA program.
  • The accounts are not a taxable employee benefit and employers' contributions are tax deductible.

Employers have great flexibility in designing plans to meet their employees' needs. Indeed, employers might even tailor benefits to suit different types of employees' medical needs.

  • For instance, employers are allowed to adjust HRA contributions based on such factors as age, medical risk or seniority.
  • Employers might even alter copayments and deductibles so as to encourage employees to buy medications for chronic conditions.
  • To encourage employees to seek preventive care, employers might stipulate a portion of the HRA is forfeited if not used within the year.

If an employer's HRA plan allows it, employees after leaving a company could use accumulated HRA funds to pay medical bills, COBRA premiums for continuing coverage under the employer's health plan or premiums for a new health insurance plan. HRAs for Retirees.

One of the most promising applications of HRAs is for retiree benefits. Employers are currently hard pressed to meet these obligations, particularly with health care costs rising at alarming rates. An HRA may serve as a "defined contribution" retirement benefit plan, giving employers more control over their future obligations.

Source: Devon Herrick, "Health Reimbursement Arrangements: Making a Good Deal Better," Brief Analysis No. 438, May 8, 2003, National Center for Policy Analysis.

For text


Browse more articles on Health Issues