For small business owners, providing comprehensive benefits packages is essential for recruiting talent and fostering positive, productive workplaces.

Rising healthcare costs have made it challenging for employers to offer group health plans. Additionally, employees often struggle to manage out-of-pocket expenses. Health reimbursement arrangements (HRAs) represent one possible solution to both problems, offering a flexible and tax-advantaged way to manage healthcare costs. In this article, we’ll cover what HRAs are and potential pros and cons to consider.

What Is an HRA?

An HRA is a benefit plan that lets employers make tax-free contributions toward their employees’ eligible out-of-pocket medical expenses. Depending on the type of HRA and the policies set by the employer, eligible expenses may include health insurance premiums, copays, deductibles, prescriptions, dental and vision care, psychotherapy, medical devices, and over-the-counter items.

How HRAs Work

It’s important to note that an HRA is not a health plan. And, unlike health savings accounts (HSAs) or flexible spending accounts (FSAs), HRAs are owned and funded solely by the employer. Employers can choose how much to contribute and whether to allow unused funds to roll over from year to year. Typically, unused funds revert to the employer upon an employee’s termination.

Potential HRA Benefits

From a management perspective, offering HRAs to employees can help small businesses attract (and retain) top talent. Plus, it encourages employees to more actively seek medical care, promoting wellness and reducing absenteeism. Financially, HRAs are tax-deductible and make it easier to budget upfront, avoiding surprise costs; they don’t need to be pre-funded – reimbursements are issued once expenses are incurred.

Potential HRA Drawbacks

Though not a significant concern, employers should know that setting up and managing HRAs can be complex and may require third-party support. Likewise, employees may need support in determining eligibility and navigating the process, especially regarding tax credit eligibility and upfront employee costs, which could put a strain on employees’ budgets.

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