How Does a Health Reimbursement Account Work?

With an HRA, medical expenses can be tax free.
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Paying medical and dental expenses with tax-free money takes some of the sting out of health care bills. When it's not your own money, it's an even better deal. This is essentially what a health reimbursement account does. You get to pay your medical costs and those of your family members using tax-exempt dollars provided by your employer.

Employers Fund HRAs

HRAs are health benefit plans funded exclusively by employers. The Internal Revenue Service does not set minimum or maximum contribution limits, meaning employers have a lot of flexibility in funding health reimbursement accounts. You can have other types of health care coverage as well. For instance, you could have a flexible spending account, regular health insurance and an HRA, all at the same time.

Using an HRA

When you pay out of your own pocket for a qualified medical expense, you submit the receipt to your company and get reimbursed. Alternatively, some HRA plans include a debit or credit card to simplify payments though you might need to submit receipts. HRA money can be used for health care costs incurred by you, your spouse and your dependents. It can also cover children under age 27 and persons who are qualified as dependents even if you did not claim them.

Qualified Medical Expenses

Distributions from HRA plans can cover virtually any medical expense as long as it's not paid for by another health care plan. For example, if your health insurance policy pays a $500 hospital bill, you can't be reimbursed for that $500 by your HRA. Eligible expenses include prescription drugs, hospital stays, doctors' visits, outpatient treatment and therapy. You may also use HRA funds to pay health insurance premiums or long-term care coverage. Insulin is covered, but over-the-counter medicines are not unless a health care provider specifically prescribes them.

HRA Tax Rules

Medical costs paid for with HRA money cannot be taken as a tax deduction since it was tax-free to start with. You cannot use HRA money for anything other than qualified medical expenses. If you do, all distributions from your health reimbursement account for the entire year become taxable and must be reported as income. However, if you don't use all the money in the account by year's end, don't worry. Leftover amounts carry forward and may be used in future years.