Health Reimbursement Arrangements

Companies are continually looking for ways to reduce their health care costs for employees. Within the past few years, a new type of plan, called a health reimbursement arrangement, has been created under which companies set aside a fixed dollar amount for each employee (employees do not pay anything toward these plans). An employee can use funds in his or her account within the plan to pay for medical costs without being taxed when funds are contributed or when they are withdrawn for approved medical expenses.

Employers may set up health reimbursement arrangements (HRAs) to allow employees to pay for unreimbursed medical expenses without any cost to them. Here's how they work. The company sets up accounts for each employee and contributes a flat dollar amount. You are not taxed on employer contributions. Similarly, when you use funds in your account to cover your medical costs, you are not taxed on withdrawals. There is no dollar limit on employer contributions on your behalf, nor on amounts you can withdraw tax free to pay for medical expenses.