What Is a Health Reimbursement Arrangement (HRA)?
A Health Reimbursement Arrangement (HRA) is a company-funded program that reimburses employees for qualified medical expenses and sometimes insurance premiums. Employers can deduct these reimbursements for tax purposes, and employees typically receive tax-free reimbursement dollars.
**Key Takeaways:**
– HRAs cover specific medical expenses and insurance premiums.
– Employers fund HRAs.
– HRAs are non-portable benefits.
– Reimbursement eligibility is determined by government rules.
How a Health Reimbursement Arrangement (HRA) Works
An HRA is established by an employer to cover employee medical expenses. The employer sets the contribution amount, and employees can request reimbursement for qualified expenses up to that limit. Contributions are consistent for employees within the same class.
Unlike an account, an HRA does not allow employees to pre-fund expenses. Reimbursement is made after incurring the medical cost, with the option of instant reimbursement if an HRA debit card is provided by the employer.
If an employee depletes the HRA funds before year-end, they must cover additional expenses with personal funds or utilize a Flexible Spending Account (FSA) or Health Savings Account (HSA) if available.
**Note:**
– Maternity clothes, gym memberships, and childcare are not covered by HRAs.
Types of HRAs
There are several types of Health Reimbursement Arrangements available.
Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)
The QSEHRA is for small businesses with less than 50 full-time employees. It can help offset health insurance costs or cover medical expenses not otherwise paid for.
The annual reimbursement limits for 2023 for individual employees are $5,850 and $11,800 for employees with families. These limits increase to $6,150 and $12,450 in 2024.
Reimbursements from the QSEHRA are tax-free for employees and tax-deductible for employers.
Individual Coverage HRA (ICHRA)
The ICHRA, introduced in January 2020, allows employees to use HRAs for individual health insurance premiums. It can also cover expenses such as copayments and deductibles.
ICHRAs enable employees to buy comprehensive individual health insurance with pre-tax dollars, whether on or off the marketplace. Qualification for premium tax credits depends on affordability standards and individual choices within the ICHRA.
Excepted Benefit HRAs (EBHRA) allow partial reimbursement of up to $1,950 yearly for medical expenses, including short-term health insurance, dental and vision premiums, and qualified medical costs.
Benefits of Health Reimbursement Arrangements
HRAs reimburse a broad range of medical expenses, including prescription medications, annual physicals, birth control, and more. Employees can also use HRAs to pay for family members’ healthcare expenses.
Additionally, HRAs provide the option for employees to purchase individual health insurance with pre-tax funds through ICHRA.
Employees can utilize HRA funds for spouses’ and dependents’ qualified medical, dental, and vision expenses.
Limitations of Health Reimbursement Arrangements
HRAs only cover eligible medical and dental expenses. These include costs to cure or prevent ailments as defined by the IRS, excluding general health maintenance expenses like vitamins.
Employers may restrict certain IRS-qualified medical expenses in the HRA plan document even though they are eligible. The scope of reimbursable expenses is determined by the employer.
The IRS allows home COVID-19 tests, face masks, and hand sanitizer as eligible expenses under HRAs, FSAs, and HSAs.
**Pros:**
– Covers medical and dental expenses, including prescriptions and exams.
– Supports individual health insurance payment with pre-tax dollars.
– Reimburses expenses after employees pay for them.
**Cons:**
– Excludes non-essential costs like teeth whitening or funerals.
– Employers determine funding levels.
– Requires expenses to be paid before reimbursement.
Health Reimbursement Arrangements vs. Other Arrangements
When an employee has both FSA and HRA covering an expense, the primary plan designated by the employer will reimburse the cost first. Once exhausted, the secondary plan will cover additional qualifying expenses.
Two alternate options for medical expense funding are Flexible Spending Arrangements (FSAs) and Health Savings Accounts (HSAs).
Flexible Spending Arrangement (FSA)
FSAs are employee-funded arrangements that allow pre-tax salary contributions. Employees decide annual contribution amounts, up to $3,050 in 2023 and $3,200 in 2024.
Unused HRA funds may carry over at the employer’s discretion. FSAs generally do not roll over unused funds but may offer a limited grace period or allow a partial rollover.
Health Savings Account (HSA)
HSAs are tax-advantaged accounts primarily funded by employees or employers alongside a High Deductible Health Plan (HDHP). Unlike HRAs and FSAs, HSAs do not cover insurance premiums and remain with employees even if they switch employers.
How Can I Use HRA Funds?
Employers determine the medical expenses eligible for HRA reimbursement, which may include health, dental, and vision services, depending on the plan.
HRAs typically cover copays, hospital stays, medical equipment, glasses, and routine doctor visits, among other expenses.
Certain expenses are ineligible, such as teeth whitening, maternity clothes, funeral services, and non-prescription medications, according to IRS guidelines.
HRA Funding and Portability
Employers solely finance HRAs and establish the maximum yearly contributions per employee. Contributions are equal within employee classes, with additional funds possible for older employees or those with dependents.
Unused HRA balances may carry over to the next year, subject to employer limits. However, HRAs do not remain with employees after leaving the company, unlike Health Savings Accounts (HSAs), which are portable.
HRA Tax Advantages
Employers can claim a full tax deduction for HRA reimbursements. HRAs offer cost predictability and can substitute traditional health benefits for various employee groups, providing tax-free reimbursements for employees and tax savings for employers.
Restrictions on reimbursements are usually capped for a coverage period. Some businesses complement HRAs with additional health benefits like FSAs to offer employees added advantages.
What Is a HRA in Health Insurance?
A Health Reimbursement Arrangement (HRA) is used by employers to refund employee medical expenses with tax-free funds.
How Does a HRA Work?
Employers set the HRA contribution amount, and employees can request reimbursement for eligible expenses up to that limit. Reimbursements are tax-free for employees, and employers can deduct these payments.
What Is a HRA vs. a HSA?
HRA reimburses employees for qualified medical expenses and insurance premiums in tax-free money. In contrast, an HSA is a tax-advantaged account for individuals covered by a High Deductible Health Plan (HDHP) to save for medical costs.
Can I Cash out My HRA?
HRA funds cannot be directly cashed out. Unused balances can roll over to the next year according to employer rules.
What Qualifies for HRA Reimbursement?
Qualified expenses eligible for HRA reimbursement include annual check-ups, prescriptions, and substance abuse treatments.
The Bottom Line
An HRA provides employers with a method to reimburse employees for authorized medical and dental expenses. With tax benefits for both employers and employees, HRAs offer cost predictability and a wide range of eligible medical expenses that can be covered.
QSEHRA and ICHRA are specific HRA types tailored for small employers and individual insurance coverage, respectively, expanding the range of health benefits that employees can access.