The terms defined contribution and health reimbursement arrangements (HRAs) are often used interchangeably. So, is there a difference? Simply put, defined contribution is a health benefits strategy, whereas a health reimbursement arrangement is a health benefits tool.
Pure defined contribution is a type of employer-sponsored health benefit where the employer decides an amount to contribution to employees' health benefits.
Employees then use their defined contribution allowances to purchase an individual health insurance plan.
With defined contribution, the employer defines an amount (a "defined contribution"), as an alternative to offering a specific group health insurance plan (a "defined benefit").
Note: This is a pure defined contribution strategy, where employees can purchase any type of individual health insurance policy from any carrier. If the employer allows, employees can also use their defined contribution allowance for out-of-pocket medical expenses.
Many experts compare the shift in health benefits from group health insurance to defined contribution health plans to the shift in employer retirement benefits from pensions to 401(k)s.
A health reimbursement arrangement is one tool that allows an employer to offer defined contribution health benefits tax-free and as a formal employee health benefit.
Health reimbursement arrangements are one of the only IRS-approved vehicles allowed to reimburse employees' individual health insurance premiums, and therefore are a critical part of any defined contribution health plan strategy.
A health reimbursement arrangement is a Section 105 self-ensured ERISA plan. Reimbursements are tax-deductible to the employer and completely tax-free to employees.
A health reimbursement arrangement is not health insurance. Rather, a health reimbursement arrangement allows the employer to make tax-deductible contributions to employees' eligible individual health insurance and medical expenses.