What Is a Retiree Reimbursement Arrangement?

Retiree reimbursement arrangements (RRAs) are a type of savings plan funded solely by employers to help their now retired former employees pay for medical expenses, including Medicare premiums and copays. While RRAs cater to the needs of retirees, active employees may find similar benefits in health reimbursement arrangements (HRAs). A financial advisor can help you prepare for retirement and plan for the medical care that you may need.

An RRA is a specialized financial vehicle that employers establish to support some former employees with specific expenses incurred during their retirement years. Unlike conventional retirement savings plans such as 401(k)s or individual retirement accounts (IRAs) that are typically funded through employee contributions, RRAs are exclusively funded by the employer.

The primary objective of an RRA is to alleviate financial pressures for retirees by subsidizing costs that are not comprehensively covered by Medicare. Eligible expenses under RRAs can encompass a broad spectrum, including medical, dental and vision care, as well as long-term care services, and in some cases, living expenses.

Qualified expenses include:

• Medical care
• Dental care
• Vision care
• Long-term care services
• Select living expenses
• Medicare premiums

However, employers set limits on how much they’ll reimburse retirees through RRAs. For example, the Mayo Clinic sponsors an RRA that offers up to $1,764 per person in 2024 for eligible retirees and Medicare-eligible spouses. As a result, the plan offers a credit of up to $3,528 for an eligible retiree and their spouse.

While RRAs help former employees pay for qualified medical expenses in retirement, HRAs are employer-funded health benefit plans that reimburse current employees for out-of-pocket medical expenses and individual health insurance premiums, up to a specific dollar amount.

These reimbursements are tax-deductible for the employer and tax-free for the employee, making HRAs a financially efficient benefit option. One of the key features of an HRA is its flexibility: employers can offer them alongside other health benefits or as a standalone option. This adaptability allows employers of all sizes to tailor health benefits to their specific needs and budget constraints.

There are several types of HRAs, each designed to serve different employer and employee needs. The most common types include the Qualified Small Employer HRA (QSEHRA), designed for employers with fewer than 50 full-time employees, and the Individual Coverage HRA (ICHRA), which can be offered by employers of any size and allows employees to use HRA funds to purchase individual health insurance coverage. Other types, like the Excepted Benefit HRA and the Group Coverage HRA (also known as an integrated HRA), cater to specific scenarios or are designed to work in conjunction with other health insurance plans.

First and foremost, contributions made by employers to an RRA are tax-deductible for the employer, thereby reducing the overall tax liability for the company. This is a substantial benefit for employers, encouraging them to provide RRAs as part of their retirement benefits package.

For retirees, the tax benefits are even more compelling. Withdrawals from RRAs used to pay for qualified medical expenses are tax-free. This means that retirees do not have to pay any income tax on the money they withdraw from their RRA, as long as it is used for eligible medical expenses. This aspect of HRAs is especially beneficial for those on a fixed income, as it maximizes the value of their retirement savings and helps stretch their dollars further in covering healthcare costs.

Retiree reimbursement arrangements offer a mix of benefits that can enhance retirees’ ability to manage their healthcare expenses effectively. The tax advantages, control and potential for financial security make RRAs an attractive option for many. However, the complexity of these arrangements, dependence on employer offerings and limited availability can temper the benefits of these plans.

• Tax advantages: Tax efficiency is one of the most significant benefits of RRAs. Contributions made by employers to an RRA are tax-deductible for the employer, and the benefits received by retirees are tax-free.
• Customization and control: Retirees have a say in how their RRA funds are used, giving them more control over their healthcare spending. This customization can be particularly beneficial for those with specific medical needs that aren’t fully addressed by standard health insurance policies.
• Financial planning and security: RRAs contribute to retirees’ financial security by earmarking funds specifically for healthcare expenses. This can help retirees budget more effectively, reducing the worry of unforeseen medical costs impacting their retirement savings.

• Complex rules: Retirees must understand how RRAs work, including eligibility, contribution limits and permissible expenses. If funds are used for non-qualified expenses, retirees may face taxes and penalties, reducing the financial flexibility that they might otherwise have with different retirement accounts.
• Employer dependence: The availability and structure of RRAs are largely dependent on employers. This means that retirees’ healthcare reimbursement benefits can vary widely based on their former employer’s specific plan offerings and the state of the company.
• Limited availability: Not all employers offer RRAs, and among those that do, eligibility criteria may limit who can participate.

Retirement reimbursement arrangements (RRAs), funded solely by employers, provide retirees with supplemental income to cover qualified medical expenses, thereby enhancing their financial security in retirement. HRAs, on the other hand, assist current employees with out-of-pocket medical costs, promoting a more mindful approach to healthcare spending. While both arrangements offer tax benefits, they serve different populations and have unique implications for financial planning and tax compliance.

• Keep in mind that you can deduct certain medical expenses on your tax return if you itemize. These expenses including insurance premiums, dental care, medical treatment, prescription drugs, as well as medical aids and devices.
• A financial advisor can help you plan and save for future medical expenses. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Photo credit: ©iStock.com/andreswd, ©iStock.com/AsiaVision, ©iStock.com/Iuliia Zavalishina