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What Is a Health Reimbursement Account?

The money in a health reimbursement account can typically be used to pay for health insurance premiums, among other medical expenses.
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  • Written By: A. Gabrenas
  • Edited By: Jacob Harkins
  • Last Modified Date: 18 October 2014
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A health reimbursement account is an account that an employer can contribute money to for an employee’s health expenses. Health reimbursement accounts are also called health reimbursement arrangements. They are often used in lieu of providing group health insurance to employees or to help defray the costs associated with a high-deductible health plan. In general, special tax rules apply to a health reimbursement account, which may benefit both the employer and the employee.

Before setting up a health reimbursement account, an employer usually must first create a plan outlining the types of expenses that may be reimbursed. For example, companies that use these accounts in place of offering group health insurance may limit reimbursements to the cost of private health insurance premiums. In cases where the company offers a high-deductible health plan, it may limit reimbursements to only those charges that go toward meeting the deductible. Companies may also choose, in some cases, to allow employees more freedom and set few limits on the use of the health reimbursement account, beyond those required by law.

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When the reimbursement plan has few restrictions on the types of expenses that can be reimbursed, it generally allows an employee greater control over his or her health care. For example, one employee with this type of plan may choose to use the funds to pay for private health insurance premiums, while another employee may choose to forgo insurance and use the funds to pay any medical bills as they come up. Some may find this preferable to a more restrictive approach.

Employers are not capped in how much money is contributed to an employee's health reimbursement account. Only the employer, however, can contribute. An employee can’t make additional contributions of his or her own money or agree to a reduction in salary for additional contributions, nor can a self-employed individual create a health reimbursement account. Employees and the self-employed may, however, have access to a similar plan, such as a health savings account or Archer MSA (medical savings account).

One of the benefits often touted for health reimbursement accounts is that the money deposited is not taxable in most cases. For employees, this means the reimbursements are generally not taxed as long as they are used for covered expenses. The funds contributed to the health reimbursement account are also generally not included in the employee’s gross income. Similarly, employers can often qualify for tax deductions on the amount contributed to these accounts.

From the health care industry prospective, health reimbursement accounts may offer the added benefit of helping to control costs. For example, some believe that when employees must pay the expenses first, then be reimbursed, he or she may be more likely to make cost-saving decisions. Such decisions may include, for example, going to the doctor during regular office hours, rather than using the emergency room.

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