Health care costs pose a significant burden for individuals and families in the personal financial planning process. One solution for managing health care costs in a personal financial plan is the Health Reimbursement Arrangement (HRA). An HRA offers a strategic approach to managing healthcare expenses for an employee on a tax-free basis, while simultaneously providing the employer with a business deduction. This blog delves into the integration of an HRA into a personal financial plan.
Understanding Health Reimbursement Arrangements (HRAs):
HRAs are employer-funded accounts designed to assist employees with eligible medical expenses. Unlike Health Savings Accounts (HSAs), HRAs are solely funded by employer reimbursements for eligible medical expenses. As an employer reimbursement plan there is not a ‘bucket of money’ like an HSA. However, HRAs offer flexibility in terms of the expenses they cover and can be a valuable component of an employee benefits package.
Strategic Contribution Planning:
Since HRAs are funded by the employer, individuals do not contribute directly to these accounts. However, as part of a personal financial plan, the personal financial planner is tasked with understanding the employer’s contribution policy and will make recommendations designed to maximize your participation and optimize the benefits received. Some employers offer tiered HRA contributions based on factors like employee age or family status. By aligning your healthcare needs with available HRA funds, you can ensure efficient utilization of these resources.
Integration with Other Financial Tools:
HRAs can complement other personal financial planning solutions/tools, such as Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs). HRAs can be used in conjunction with these accounts to cover medical expenses. Coordinating these benefits effectively ensures comprehensive coverage while optimizing tax advantages.
Long-Term Planning Considerations:
When incorporating HRAs into a personal financial plan, it’s essential to consider factors such as retirement and healthcare expenses in later stages of life. Since HRAs are primarily intended for current healthcare needs; keep in mind, employees over age 65, can receive reimbursement for Medicare premiums, if the plan allows.
Health Reimbursement Arrangements and Health Benefits:
Beyond their financial implications, HRAs can also impact health outcomes. By providing coverage for essential medical expenses, HRAs promote preventive care and proactive health management. This, in turn, can lead to better overall health outcomes and reduced healthcare costs over time. Encouraging employees to utilize HRAs for preventive services fosters a culture of wellness within organizations, benefiting both employees and employers alike.
Tax Efficiency:
One of the significant advantages of HRAs is their tax-free status. Reimbursements for eligible medical expenses are not subject to federal income tax.
Tax laws directly impact an individual’s personal financial plan. At Paraklete® Financial we work with CPA’s as part of our client’s collaborative team of advisers. The collaborative team is essential to the personal financial planning process. For more information, please visit us at https://www.parakletefinancial.com
