Health Reimbursement Accounts or Health Reimbursement Arrangements (HRAs)
HRAs are Internal Revenue Service (IRS)-sanctioned programs that allow an employer to reimburse medical expenses paid by participating employees, thus yielding tax advantages to offset health care costs.
HRAs are initiated by the employer and serviced by a third-party administrator or plan service provider. The employer may provide in the HRA plan document that credit balances in an employee’s HRA account can be rolled over from year to year like a savings account. The employer decides if the funds are rolled from year to year and how much rolls over (which can be either a flat amount or a percentage).
According to the IRS, an HRA “must be funded solely by an employer,” and contributions cannot be paid through a voluntary salary reduction agreement (i.e., a cafeteria plan). There is no limit on the employer’s contributions, which are excluded from an employee’s income.
According to the IRS, “employees are reimbursed tax free for qualified medical expenses up to a maximum dollar amount for a coverage period”. HRAs reimburse only those items (copays, coinsurance, deductibles and services) agreed to by the employer which are not covered by the company’s selected standard insurance plan (any health insurance plan, not only high-deductible plans). These arrangements are described in IRS Section 105.
With an HRA, employers fund individual reimbursement accounts for their employees and define what those funds can be used for – i.e., specified out-of-pocket expenses such as deductibles and co-pays.
Qualified claims must be described in the HRA plan document at inception, i.e., before reimbursing employees for those medical expenses. Arrangements (medical services, dental services, co-pays, coinsurance, deductibles, participation) may vary from plan to plan, and an employer may have multiple plans in place, allowing much flexibility.
The employer is not required to prepay into a fund for reimbursements, instead, the employer reimburses employee claims as they occur.
Reimbursements under an HRA can be made to the following persons:
- Current and former employees.
- Spouses and dependents of those employees.
- Any person the employee could have claimed as a dependent on the employee’s return except that:
- The person filed a joint return,
- The person had gross income of $3,400 or more, or
- The employee, or his/her spouse if filing jointly, could be claimed as a dependent on someone else’s 2007 return.
- Spouses and dependents of deceased employees.
Advantages, disadvantages, and limitations
Advantages of HRAs for employers include:
- Reimbursements of qualified claims are tax-deductible for the employer.
- Employers know their maximum expense related to their health care benefit.
Advantages of HRAs for employees include:
- Contributions that employers make can be excluded from employees’ gross income.
- Reimbursements may be tax free if the employee pays qualified medical expenses.
- Unused funds in the HRA can be rolled into future years for reimbursement.
- HRAs may be offered in conjunction with other employer-provided health benefits including Flexible Spending Accounts (FSAs).
- Employees do not have to be covered under any other health care plan to participate, unlike (for example) a Health Savings Account (HSA) which requires a High Deductible Health Plan.
- Employees can be reimbursed for a health care plan that meets their or their families’ specific needs, as opposed to a standard company plan.
A frequent complaint regarding HRA arrangements is that they are extremely opaque in regards to their requirements. HRAs must follow “a variety of statutory rules and provisions” including the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) continuation coverage requirements, the Employee Retirement Income Security Act (ERISA), and the Health Insurance Portability and Accountability Act (HIPAA). Rules pertaining to their reimbursements are perceived by member participants to be somewhat contradictory and/or even incoherent- leading some to lose contributions which are intended for healthcare but are learned (after the procedure or laboratory test) to be disallowed.
Limitations of HRAs include:
- Self-employed persons are ineligible.
- “Highly compensated” participants may be subject to “certain limitations.”
HRAs from Our Carriers
Here’s a way your employer can help you take care of your health. With an HRA, your employer sets up a fund to help you pay for certain health care expenses. An HRA gives you these advantages:
- Planning for the Future – Unused HRA funds may carry over to the next year, as long as you stay in the plan. This way, you can build up your fund for when you really need it.
- Flexibility – Your fund gives you a head start on paying for health care. And with preventive care covered at 100 percent, you can keep more in your fund. After you’ve used up your fund, you’ll have a health plan which pays for a portion of some expenses. Your health plan begins to pay after you meet a deductible amount.
- Savings – Once your health plan starts paying its share, you’ll pay a smaller portion of these costs from your own pocket.
For more information on how HRAs work, visit IRS.gov.
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