If you are contemplating retirement, one of your foremost concerns is probably the issue of medical insurance. How will you pay for it when you are no longer receiving a regular paycheck? If remaining on your employer’s medical plan is an option, this may be something to consider. However, it’s very possible that your employer is eager to transition you off their medical plan and offer you a Health Reimbursement Arrangement (HRA) instead.
What is an HRA?
A Health Reimbursement Arrangement is an interest-bearing, employer-funded account created in your name. Deposits can be made completely tax-free¹, meaning that you receive 100% of the value of each benefit dollar.
The HRA account is designed to reimburse retirees for their eligible medical expenses and/or premiums to offset their out-of-pocket costs. Your employer determines which qualified medical expenses are eligible for reimbursement under the plan.
What are my HRA Options?
There are two HRA options designed to benefit retirees: a Defined Contribution HRA or a Retiree HRA.
- With a Defined Contribution HRA, funds are deposited while you are still actively working, growing over time, and becoming available for use upon retirement or separation of service. Participants are 100% vested immediately, meaning that you own the account balance as soon as the account is established.
- With a Retiree HRA, funds are deposited in a lump sum upon retirement/separation of service. The funds are invested once deposited, and can be used immediately upon deposit.
For both types of HRA, account balances roll over year to year, qualified expenses are reimbursed tax-free, and funds can be used to reimburse eligible medical expenses incurred by you, your spouse, and any qualifying dependents.
Additionally, both of these HRA types provide an opportunity to bridge the gap between retirement and Medicare eligibility. Given this financial incentive from your employer, you may consider retiring earlier than planned, and you may choose to seek an alternative healthcare option, rather than remaining on your employer’s plan.
Similar to a Special Pay Plan, both the Defined Contribution HRA and Retiree HRA can be funded using your unused sick leave or vacation pay.
Although a Special Pay Plan is structured differently than an HRA, it is an equally valuable retirement benefit. If your employer offers a Special Pay Plan and you’d like to learn more about its advantages, please click here.
¹Not subject to FICA, Federal or State income taxes