HRA - The New United Pilots' Health Reimbursement Account. How Does it Work and What are the Benefits?

United Airline Pilots Benefits: RHA vs HRA. What's the Difference

United Pilots have many useful benefits from United and ALPA. So many, they can sometimes be confusing. Between the PRAP, PCRA, PBGC, RHA, HSA, FSA, and HRA, they all seem to blend together. One of the common questions we get from our United Airlines pilots is the difference between the Retirement Health Account (RHA) and the Active Health Reimbursement Arrangement (HRA). Our goal is to help you better understand these accounts, and the differences between them.

RHA

The Retirement Health Account (RHA) is a unique account only available to United Airlines pilots. It was added as a benefit to pilots in a Private Ruling Letter from the IRS. It is no wonder it’s so hard to find any information about the RHA, it is because very few of them actually exist! The RHA is a fringe benefit that benefits pilots by helping them save for health expenses in retirement. The RHA exists so pilots still have a “spillover” account once their 401(k) hits the employer contribution max for the year. The RHA is a nice added benefit, however, it cannot be used until retirement or separation from the company. Under the new package, offered last year, the HRA replaces the RHA going forward. Now the question you want answered is to understand and best leverage the HRA.

HRA

The Active Health Reimbursement Account (HRA) is a new account available for United Pilots, added in mid-2021. It effectively replaces the RHA as the spillover bucket. If you are a pilot enrolled in a United Medical Plan, all contributions will go to the HRA going forward, instead of the RHA. No new contributions will be added to your RHA. If you are not in a United Medical Plan (You have health insurance somewhere else) You will still have your excess funds contributed to the RHA. It is important to note that the current RHA balance will NOT be moved into the HRA. So you will have an RHA balance and HRA balance.?

How is the HRA Funded?

United contributes $1.00 to your HRA for every flight hour. Further, once United maxes your employer 401(k) contribution, United’s 16% 401(k) contribution will “Spill” into the HRA bucket. So maximizing your 401(k) contribution could mean more money in the HRA at the end of the year. Pilots can also have their vacation forfeiture contributed to the HRA. It is important to note that you as an employee CANNOT directly contribute to the HRA.

When does the HRA get Funded by United

There is an annual compensation limit of $305,000 (2022) in which United cannot add 16% to your 401(k) above that salary limit. For example, they will contribute 16% of your salary into your 401(k), until your salary reaches 305,000. Once that happens, the 16% contribution will move to the HRA. That means the most United can add to your 401(k) is $48,800 ($305,000 X 16%) in 2022. Any money above that goes to the HRA as 16% of your salary. A pilot cannot contribute at all to the HRA, only United can contribute.?

What can I use my HRA for?

The HRA functions identically to the RHA in what it can be used for, and the best part is that it can be used while you’re active! It acts very similarly to a Health Savings Account (HSA). They can cover medical, dental, vision, and Long Term Care premiums, co-pays, and deductibles. A full list of qualified expenses can be found here on the IRS website as well as the guide below: https://www.irs.gov/pub/irs-pdf/p502.pdf

Why the HRA is a good deal

The HRA receives the rare “Triple tax-treatment” that only the HSA can say it enjoys. What that means is United contributes to the HRA tax-free, it grows in the account tax-free, and the distribution of the total amount is tax-free if used for a qualified expense. It’s government free money! If you need a co-pay of $5,000 for a qualified surgery, you can use the HRA to pay for every dollar of it and not pay any taxes.

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What is the major difference between the HRA and RHA?

The only major difference between the HRA and the RHA is that the HRA can be used now for qualified medical expenses, while the RHA cannot be used until the pilot is retired. The HRA functions very much like the HSA, however, the HRA is not portable to you and cannot be moved out of the United HRA trust or be invested based on how the pilot pleases.

The HRA is in a Trust at United

The HRA Trust offers protection, but inflexibility. The trust cannot be used by United or any other creditor. It is legally shielded from any bankruptcy or failure by United. Your money in the trust cannot be moved out of it, either while active or in retirement. If you pass away, the right to the benefit goes to your spouse or any dependent (someone under 26 or with a disability). If you no longer have any spouse or dependent and pass away, your total benefit is reverted back into the trust. It is not a portable account and cannot be gifted or bequeathed.

Should you have an HSA and an HRA?

Yes. If you are currently using the HSA, continue to do so. Why? Funding the HSA reduces your current taxes, grows tax-free, and distributes tax-free. It is one of the only accounts to have “Triple favorable tax treatment”. Fidelity estimates a couple age 65 in 2021 will need $300,000 saved to pay for medical expenses. Taking advantage of both of these accounts will put you in a great position to handle retirement and unexpected expenses and health expenses. For younger pilots that are not maximizing their 401(k) plans yet, the HSA does not make a ton of sense, because you should save for retirement before retirement health expenses. The HSA is extremely beneficial in retirement, but you have to be ABLE to retire confidently before taking advantage of it!

Turning "Off" your HRA

One thing to be aware of is that United will automatically have your HRA turned "On" to pay for your part of your health insurance premiums. Although you can certainly leave the HRA on to pay for you premiums, this is not a tax-efficient strategy. You can deduct your health insurance premiums from your taxes already, so using the HRA to cover your premium is wasting the tax-favorability of the HRA. We suggest in general, to turn "Off" the HRA if it is paying your health insurance premiums, and only use it if you have a major health related expense. This will ensure you are not draining the account.

Why work with us

Nick Coleman is a CERTIFIED FINANCIAL PLANNER and helps United pilots and other major airline pilots build wealth and plan for a confident retirement by providing financial planning and investment management advice to his clients.

Want a conversation about your strategy and future goals? Find a time with us for a complementary meeting:?https://go.oncehub.com/30MinuteNick

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The information set forth herein was obtained from sources which we believe to be reliable, but we do not guarantee its accuracy.??In preparing these materials, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public and internal sources. Bonfire Financial shall not in any way be liable for claims and make no expressed or implied representations or warranties as to their accuracy or completeness or for statements or errors contained in or omissions from them.