What Is a Health Reimbursement Arrangement (HRA)?
- HRAs pay employees for a variety of medical expenses, as well as insurance premiums in some cases.
- HRAs are funded by employers, not employees.
- An HRA is not transferable; when an employee leaves the firm, they lose this benefit.
- Which expenses can be paid for employees are determined by government rules, which businesses might refine further.
- Funds from an HRA can be used to reimburse health insurance premiums, vision and dental insurance premiums, and eligible medical expenses, depending on the type of HRA.
How a Health Reimbursement Arrangement (HRA) Works
A health reimbursement agreement is a plan established by an employer to cover its employees' medical expenses. The company sets the amount it will contribute to the plan, and the employee can request reimbursement for actual medical expenses up to that amount. The HRA contribution must be the same for all employees in the same class. 1
An HRA is not the same as a bank account. Employees are unable to take out funds in advance and then utilize them to cover medical bills. Instead, they must first incur the expense before being paid. If the employer provides an HRA debit card, reimbursement can be made at the time of service. If an employee uses up all of his or her HRA funds before the end of the year, he or she will have to pay for any subsequent medical bills out of pocket or with funds from a flexible spending account (FSA), also known as a flexible spending arrangement, or a health savings account (HSA) for employees with a high-deductible health plan (HDHP).
Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)
A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is a health insurance subsidy plan for employees who work for companies with fewer than 50 full-time employees. A QSEHRA, also known as a small business HRA, can be used to pay for medical expenses that might otherwise go unpaid by health insurance. 1
The Internal Revenue Service establishes the annual restrictions (IRS). Individual employees can be reimbursed up to $5,300 per year in 2021, and employees with families can be reimbursed up to $10,700 per year (increasing to $5,450 for people and $11,050 for families in 2022). 34. Employees are tax-free, and employers are tax-deductible on the amount they are reimbursed.
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Individual Coverage HRA (ICHRA)
Individual Coverage HRAs (ICHRAs) is a newer type of HRA that has only been available since January 2020. Individual health insurance premiums could not previously be paid with HRAs. However, beginning in January 2020, companies will be able to provide their employees with a new sort of HRA known as an "individual coverage HRA" in place of group health insurance. 5
Employees can utilize their HRAs to purchase comprehensive individual health insurance with pretax cash, either through the Affordable Care Act's health insurance marketplace or outside of it. Individual coverage is available. Employees can also be reimbursed for qualified health expenses such as copayments and deductibles through HRAs. 1
Whether or not your ICHRA qualifies you for a premium tax credit to help pay for health insurance coverage under the Affordable Care Act is determined by whether or not your employer's ICHRA meets minimum standards for so-called "affordability," as well as whether or not you choose to opt-in or out of the coverage.
Excepted Benefit HRAs (EBHRA)
Employers who continue to offer standard group health insurance can also provide employees with excepted benefit HRAs (EBHRAs), which pay employees for up to $1,800 in qualified medical expenses each year. 6. Even if employees decline group health insurance, they can join in an "excepted benefit HRA," but they cannot use the funds to purchase complete health insurance. They can, however, put the money toward short-term health insurance, dentistry and vision insurance premiums, and other eligible medical expenses.
Benefits of Health Reimbursement Arrangements
Prescription medications, insulin, an annual physical exam, crutches, birth control pills, meals paid for while receiving treatment at a medical facility, care from a psychologist or psychiatrist, substance abuse treatment, transportation costs incurred to get medical care, and much more are all covered by HRAs. Employees can also utilize their HRAs to purchase complete individual health insurance with pretax cash through the individual coverage HRA outlined above (ICHRA).
Limitations of Health Reimbursement Arrangements
Only eligible medical and dental expenditures are covered by an HRA. Medical expenses, according to the Internal Revenue Service (IRS), are costs expended to treat or prevent a physical or mental condition, not general health expenses such as vitamins. 7
Teeth whitening, maternity apparel, burial services, health club membership fees, prohibited substances, childcare for a healthy infant, marriage counseling, medication from foreign nations, and non-prescription medications are examples of expenses that do not qualify as required medical expenses.
Even if the expenses are qualified by the IRS, an employer may be able to deduct them. The list of reimbursable medical expenses for employees will be outlined in an employer's HRA plan agreement.
Tip: At-home COVID-19 tests, as well as personal protective equipment like face masks and hand sanitizer, are both considered eligible medical expenses that can be paid or reimbursed under health flexible spending accounts, health savings accounts, and health reimbursement arrangements, according to the IRS (HRAs).
Health Reimbursement Arrangements vs. Other Arrangements
An employee who has both an FSA and an HRA and incurs a cost that is eligible for reimbursement under both plans is unable to pick which plan would cover the cost. Rather, the costs will be refunded through the plan that the employer has established to pay first. When the first plan is exhausted, the second plan will be used to cover any additional eligible medical expenses that are reported for reimbursement.
Here are two alternative choices for paying for out-of-pocket medical bills:
FSA
In contrast to an HRA, an FSA is funded with a portion of an employee's pre-tax compensation, and each employee decides how much money should go into these arrangements annually—up to $2,750 in 2021 (and $2,850 in 2022). 910
HRA monies that have not been spent may be carried over to the following year at the employer's option. Unused FSA payments are generally not transferable to the following plan year, though an employer may grant a limited grace period (2.5 months) or allow up to $550 in carryover. 11
As a result of the COVID-19 epidemic, the rules for using unused FSA funds were temporarily altered. Employees can carry over money up to the full yearly amount allowed ($2,750) for healthcare FSAs from 2020 to 2021 and from 2021 to 2022, according to the passage of the Consolidated Appropriations Act, 2021, which was signed into law by former President Donald Trump at the end of December 2020.
HSA
A health savings account (HSA), in contrast to an HRA, is a fully vested tax-advantaged account that is not subject to forfeiture if money is left in the account at the end of the year. An HSA is used in conjunction with a high-deductible health plan (HDHP) to pay for medical and dental expenses. The employee or employer contributes to the account, which, like an FSA, cannot be used to pay for insurance premiums. 14
Employees can keep their HSAs if they change jobs, unlike HRAs and FSAs.
Special Considerations HRA Funding and Portability
The employer is exclusively responsible for funding the health reimbursement arrangement, as well as determining the maximum yearly contribution for each employee's HRA. Employers decide how much to contribute to employees' HRAs, with the exception that, as previously stated, all workers in the same class of employees must get the same contribution. Workers who are older or have dependents may be eligible for a higher wage.
Any HRA funds left over at the end of the year may be rolled over to the following year, albeit an employer may designate a maximum amount that can be carried over from one year to the next. Furthermore, the HRA does not follow an employee if they are fired or leave the employer to work for another company. This distinguishes it from a portable HSA (health savings account).
HRA Tax Advantages
Employer payments through the HRA are tax-deductible to the full extent allowed by law. An HRA can be used by a company to cover the health costs of retired employees as an alternative to more expensive retiree healthcare. Furthermore, because the plans are entirely paid by employers, they provide certainty, allowing firms to estimate their maximum HRA health benefit spend for the year. 1
Employees can use the plan to pay for a variety of medical bills that aren't covered by their health insurance. They may also use it to pay for medical, dental, or vision insurance premiums, depending on the HRA type. Furthermore, reimbursements are tax-free up to a maximum amount for a coverage period. In addition to an HRA, some organizations may provide employees with other employer-provided health benefits, such as an FSA.