Employers
Health Reimbursement Arrangement (HRA) 105
HRAs are funded by the empoyer and reimburse out-of-pocket medical expenses incurred by the employee and the employee's spouse and dependents. Medical expenses eligible for reimbursement include deductibles, co-pays, treatments not covered by your insurance plan (such as braces!) and even out-of-pocket medical insurance costs. The reimbursements are sheltered from federal, Social Security, and state taxes.
HRAs are not subject to the complex rules for medical flexible spending arrangements funded through salary reduction plans under a cafeteria plan, also known as "Section 125" plans.
What's more, if the HRA provides reimbursement up to a fixed dollar amount, any unused funds at the end of the year can be carried forward to the next year. The "use it or lose it" rules don't apply to an HRA.
Consider this: If a taxpayer pays 15% federal tax, 15% Social Security tax and a 5% state tax and is reimbursed $2000 pursuant to an HRA, he will save himself $700 of tax. The same $2000 deducted on Schedule A of the tax return will probably yield no tax savings.