A Health Reimbursement Arrangement (HRA), also referred to as a health reimbursement account, is an IRS-approved, employer-funded, tax-free employer health benefit plan that reimburses employees for out-of-pocket medical expenses.
The primary requirements for an HRA are that (1) the plan must be funded solely by the employer and cannot be funded by salary reduction, and (2) the plan may provide benefits for substantiated medical expenses only.
Why consider an HRA?
HRA plans enable employers to control costs of providing healthcare benefits while providing a valuable employee benefit.
HRAs are most commonly offered in conjunction with health plans with higher deductibles. As a rule, moving to a higher deductible health plan results in reduced premium costs, which creates real savings on health care costs for the employer.
HRA contributions may then be funded using the savings gained from the lower premium costs. By funding an HRA, the employer effectively bridges the gap between the higher deductible and the expenditure amount at which the insurance coverage begins for the employees.
Not to mention, because the benefits are divided among all employees, with relatively few employees receiving the maximum HRA benefit, the employer should realize savings.
This is in direct contrast to the employer continuing to pay a full benefit premium to an insurance company regardless of overall plan usage.
HRA benefits are tax-free to the employee and tax-deductible to the employer as they are incurred.
HRAs must be “integrated”.
An HRA must be integrated with a group health plan and all individuals receiving HRA benefits must be covered by a group health plan. Why? Because an HRA is a group health plan, it is subject to the Affordable Care Act (ACA) group health plan requirements. Under the ACA, group health plans may no longer have annual or lifetime limits and must provide preventive care coverage for their participants. These requirements were problematic for employer-sponsored HRAs because HRAs have annual limits and do not provide preventive care benefits. As a result HRAs not attached to a group health plan were deemed non-compliant by the ACA (see IRS Notice 2013-54 and IRS Notice 2015-17).
Flexibility for the employer in HRA plan design and in operation.
- Employer chooses eligible expenses. An HRA may reimburse any expense considered to be a qualified medical expense under IRS Section 213 of the Internal Revenue Code (i.e. deductibles, copays, dental, vision and hearing expenses). Within IRS guidelines, employers may restrict the list of reimbursable expenses in any way they choose for their HRA plan.
- No federally imposed minimum or maximum benefit amounts.
- Eligible recipients may include the employee and their dependents or retirees.
- Medicare premium reimbursement is permitted for employers with less than 20 employees where Medicare pays primary.
- Unused HRA balances may roll forward to be used for dates of service in future plan years (or not).
- HRAs are typically “unfunded”; no funds are expensed until reimbursements are paid. Through HRAs, employers reimburse employees directly only after the employees incur approved medical expenses.
While employers do have flexibility in plan design decisions, there are IRS non-discrimination rules that apply to an HRA. Contact FlexBank for more information at Compliance@FlexBank.net.