Massachusetts Health & Accident Insurance Practice Exam

How is the amount in an HRA viewed for tax purposes?

1. Always taxable for the employee

2. Tax-free to the employee when used for eligible expenses

3. Subject to income tax on the employer's side

4. Taxable only if the employee leaves the company

The correct answer is: Tax-free to the employee when used for eligible expenses

The amount in a Health Reimbursement Arrangement (HRA) is viewed as tax-free to the employee when used for eligible medical expenses. This means that as long as the funds are utilized for qualified healthcare costs, such as copayments, deductibles, and other qualifying medical expenses as defined by the IRS, they do not incur any income tax liabilities for the employee. This tax advantage encourages employees to use their HRAs for necessary healthcare expenses instead of taxable income, making HRAs beneficial both for employers offering them and for employees utilizing them. This understanding of HRAs is particularly important for employees and employers as it shapes how healthcare reimbursements are structured and the financial implications for both parties. The arrangement helps manage healthcare costs while providing tax incentives, which can be a significant benefit in an employee's overall compensation package.