Health Reimbursement Arrangements (HRA)

A health reimbursement arrangement (HRA) is an employer-funded program that reimburses employees for certain medical costs and, occasionally, insurance premiums. Employee reimbursement funds are typically tax-free, and employers can deduct the reimbursements they make through these plans from their taxes. These arrangements can be beneficial for both employees and employers for a number of other reasons, as well. 

Jump To:

• How HRAs Work

• Types of HRAs

• What Do HRAs Cover?

• The Cost of an HRA

• What if HRA Funds Aren’t Used?

• Advantages and Disadvantages of an HRA

• HRA Rules for Employers

• HRA Administrators

• How HRAs Differ from HSAs

• FAQs

• The Bottom Line

How HRAs Work

A health reimbursement arrangement is an add-on to a group health insurance plan, or in some cases, a stand-alone arrangement for reimbursing healthcare premiums, that allows businesses to help cover some of their employees’ medical expenses. Unlike something like a health savings account (HSA), a HRA isn’t a savings account. Employees are unable to put money aside, or to take money out in advance from a HRA to use for medical expenses. 

Instead, they have to pay for services/items upfront and then request reimbursement. Employers may also decide to give employees a debit card to use for paying medical bills in place of reimbursements. Everything paid for with HRA money must be eligible medical expenses in order for the money to be tax-free for the employees, and tax-deductible for the employers.

Your employer decides the amount that they contribute to an HRA, but the HRA contribution must be the same for all employees in the same class (for example, full-time, part-time, etc.).

There are five basic steps to implementing HRAs, regardless of type:

1. The company decides the maximum amount available to the employee.
2. The employee pays their bill, whether it’s for a medical service or a health insurance premium.
3. The employee then submits all the documentation of the payment, which is generally just an invoice.
4. The company then goes over the invoice to check that the service is eligible for reimbursement, the date of the service, and how much the employee paid.
5. If the company approves the invoice, the employer will reimburse the employee for the payment. This process happens until they reach the maximum amount available to the employee.

Types of HRAs

There are several types of HRAs that are available depending on the company’s size, as well as other factors:

1. Integrated HRA – This type of HRA must be integrated with group health insurance. And employees must enroll in the group health insurance plan in order to enroll in this HRA. You can modify this HRA in a variety of ways. Such as with a 213(d) HRA, which includes all qualified costs as defined by IRS Code Section 213 (d). These are the same tax-favored expenses that are allowed for other pre-tax accounts, including a health savings account (HSA). There is also a wellness HRA, which only covers 213(d) wellness-related expenses, including things like programs to help people quit smoking, annual physicals, tests for preventive care, and weight-loss initiatives. HRAs for wellness are pre-tax accounts.
2. Individual Coverage HRA (ICHRA) – Your employer does not have to offer this type of HRA with a group health insurance plan. An ICHRA can actually replace group health insurance. Employees can use the money in the ICHRA to pay for their individual healthcare coverage. It’s important to note that ICHRAs cannot be made available to employees who receive group health insurance. Employees have to enroll in either individual health insurance or Medicare Parts A, B, or C in order to be eligible. Employees are not eligible to enroll if they don’t have coverage under a spouse’s insurance or a healthcare sharing ministry plan. Employers can choose to have the plan cover both premiums and 213(d) qualified expenses. Or they can opt to use the money only for premiums.
3. Excepted Benefit HRA (EBHRA) – An EBHRA enables employers who provide group health insurance to set aside up to $1,800 per employee annually as reimbursement for out-of-pocket medical expenses. As well as for premiums for excepted benefit coverage, such as COBRA premiums, dental and vision insurance, and short-term limited duration insurance. There is an exclusion for Individual health insurance premiums. Whether or not they enroll in your group health plan, any employee who you offer the group health plan is able to take part in an EBHRA.
4. Qualified small employer health reimbursement arrangement (QSEHRA) – This allows employers to give tax-free money to employees to pay for qualifying expenses, but it can only be offered if the company has less than 50 employees and meets other requirements. QSEHRAs are an option for small employers who might struggle with offering group health insurance to assist their staff with healthcare expenses. Your employer cannot offer QSEHRAs alongside a group healthcare plan.
5. Retiree HRA – This type of HRA can only be offered to a business’s retired workers. It’s available to companies of all sizes. It has no allowance restrictions or requirements for group health insurance, and annual rollover is possible if the employer permits it.
6. Dental and Vision HRA – Employers who also want to offer dental and vision coverage to staff members can use a dental/vision HRA to reimburse only these costs. These very specific and limited HRAs are frequently combined with HSAs. This helps employees pay for expenses not subject to the HSA deductible requirement.
7. Standalone HRA – Unlike integrated HRAs, stand-alone HRAs are not linked to a group health insurance plan. With this type of HRA, an employer provides employees a fixed monthly allowance for eligible medical expenses. Such as individual health insurance premiums and other qualified medical expenses. Any business can use it, and there are no constraints on the allowances, or needs for group health insurance.

What Do HRAs Cover?

HRA funds can reimburse any qualifying medical expenses. The IRS is who decides what medical expenses qualify for reimbursement. The extensive list of qualifying medical expenses includes any costs associated with the diagnoses, treatment, prevention, and cure of diseases. Transportation costs to and from medical treatment facilities are also a qualifying medical expense. HRAs can even cover insurance premium costs.

To see health insurance costs and information specific to your state click here!

The Cost of an HRA

For the employees, the cost of an HRA is only the amount they pay for their medical expenses before reimbursement. Once they’ve maxed out their HRA funds for the year, they will then have to pay for all of their medical expenses out-of-pocket. There are no account or maintenance fees for an HRA. Because the employer is the only one who contributes to it. And, since the employer decides how much goes into the account, they decide what their cost per employee per year is.

What if HRA Funds Aren’t Used?

HRAs are very customizable, so each one will look a little different, depending on the options that the employer chooses. When it comes to the possibility of rolling over funds, employers have the option of carrying over all or a portion of any unused funds. 

Employers also have the option to refuse carryover. Businesses, though, cannot decide to give employees any extra money at the end of the year. In addition, HRAs are not portable. This means the HRA does not follow the employee if they are fired or leave the employer to work for another business. Once you no longer work there, the unused HRA money goes to your employer. There is however usually a post-termination period, generally about 90 days. During this time, you can apply for reimbursement for any medical expenses that you had prior to ending your employment there. So, if you happen to have a doctor’s appointment two days before you leave your job you can still get a reimbursement.

Advantages and Disadvantages of an HRA

HRAs are an excellent method for employers to help employees with some of their healthcare expenses. But there are drawbacks as well as advantages:

Pros

• HRAs can pay for medical expenses like prescription drugs, yearly physicals, and birth control, as well as insurance premiums.
• HRA reimbursements are not an income, so employees are exempt from paying income and payroll taxes on them.
• Small businesses that cannot afford the expense of standard health insurance can assist in easing the financial load on employees by using HRAs.

Cons

• HRAs cannot pay for expenses that are not necessary. Such as non-prescription drugs, burial services, or teeth whitening.
• The employer decides how much money goes into the account, since they are the ones who set up the account. So, employees might not have enough to pay for all of their expenses.
• You can only withdraw money after you pay the bill.

HRA Rules for Employers

Again, HRAs have the advantage of being very customizable for employers. The choice to offer an HRA alongside group health insurance or as a way to pay individual premiums, the amount given to employees, and the choice to carry over the money from one year to the next is up to the employer.

But there are some guidelines. First, businesses cannot receive employee contributions into an HRA, including through pay deferrals. Additionally, you can only use the funds to cover eligible medical expenses. Otherwise, the employer will not be able to deduct them.

For our guide to other types of insurance your small business might need click here!

HRA Administrators

Although businesses can manage the HRAs themselves. Utilizing an HRA administrator to undertake paperwork reviews, offer customer service, and create your plan documents will help you avoid HIPAA privacy violations and any compliance issues. HRA administrators can offer real-time monitoring of HRA liabilities, reimbursement, and usage. 

How HRAs Differ from HSAs

HSAs and HRAs have certain similarities, but they also differ from each other in important ways. An HSA is a tax-advantaged account that can be used for qualified medical expenses. Like medical, dental, and eye care as well as prescription medications. Employees contribute to these accounts themselves, similar to a savings account, although employers can also contribute to them. These accounts are only available alongside an HSA-qualified high deductible health plan (HDHP). 

HRAs, again, are not accounts, and your employer can offer them either alongside group healthcare or alone. And can only be funded by an employer. 

One of the most important differences between HRAs and HSAs is that the business who offers the HRA, owns it. And employees own their own HSAs. This means that if an employee with a HRA leaves a company, the employee does not keep the HRA funds. 

FAQs

• What is a HRA?

An HRA is a type of health spending account that your employer owns and provides to you. You can use the money in it to pay for medical, pharmacy, dental, and vision expenses.

• When are the funds deposited into a HRA?

The employer decides how much money to put into an HRA and when. An employer can contribute money every month, every three months, every six months, every year, or in some other way, or even by the claim. These details will be in the Summary Plan Description (SPD).

• Can a HRA reimbursement come from multiple accounts?

People can’t claim the same cost twice, which is called “double dipping.” But in some cases, you may be able to get money from more than one account. Take the case of a participant who has both an HRA and an FSA. This person gets a $500 bill, but the HRA only has $200 in it, so they get the $200. The participant can then use their FSA to pay for the last $300.

• If I leave my company, who keeps the HRA money?

Since the employer owns the HRA account, if a participant leaves the company, the money stays with the company. But some employers have HRAs or other plans that let employees use the money for a certain amount of time. Meaning even if you leave the company, you may be able to use it for a certain number of years before it is taken away.

The Bottom Line

HRAs are a terrific way for employers to help ease the financial strain on employees of out-of-pocket medical expenses. Employers can keep costs under control while giving staff members a benefit that lets them pay for their own medical care. There are multiple types of HRAs to choose from, so many businesses can find one that works for them. It’s this flexibility that makes HRAs so unique, and so increasingly popular. To get started, simply put your zip code into the box below or give one our licensed agents a call at 877-670-3557.