What are HRAs and are they right for your business?

A Health Reimbursement Arrangement (HRA) is a company-funded plan that reimburses employees for qualified medical expenditures. Understanding “what is HRA” and how it functions could save you significant amounts on healthcare costs! This article will navigate you through the essentials of HRAs, the different types available, how they compare to similar plans, and what to consider in terms of eligibility, benefits, and limitations.

Key Takeaways

• Health Reimbursement Arrangements (HRAs) are tax-advantaged, employer-funded accounts for reimbursing employees’ eligible medical expenses and insurance premiums, with employers having the ability to exclude specific IRS-qualified expenses from coverage.

• There are several types of HRA’s each designed for different employment situations and offering varying benefits and reimbursement options.

• HRAs have significant tax benefits for both employers and employees, with employer contributions not subject to employee income tax, though the plans also come with limitations such as lack of portability and the requirement to first incur expenses before seeking reimbursement.

Deciphering Health Reimbursement Arrangements (HRAs)

A Health Reimbursement Account (HRA), also known as a health reimbursement arrangement, is an employer-funded account designed to provide tax-free reimbursements for eligible medical expenses and insurance premiums. The scope of medical expenses covered by HRAs, also known as health reimbursement accounts, is broad, encompassing items such as:

• prescription medications

• annual physical exams

• crutches

• birth control pills

• psychological treatment

• substance abuse treatment

With a health reimbursement arrangement HRA, employees can enjoy the benefits of tax-free reimbursements for a wide range of medical expenses.

Additionally, employees can utilize HRAs for medical, dental, or vision insurance premiums, including dental insurance premiums.

However, there’s a catch. Unlike a bank account, employees cannot withdraw funds in advance from HRAs. They are required to first incur the medical expense and then seek reimbursement for it. Moreover, employers have the authority to omit certain medical expenses from HRA coverage, even if they are deemed qualified by the IRS.

Navigating the Different Types of HRAs

To fully benefit from HRAs, one must comprehend the different types available. The three main types are Individual Coverage HRAs, Qualified Small Employer HRAs, and Excepted Benefit HRAs, each with its unique features and advantages.

Exploring Individual Coverage HRAs

Individual Coverage HRAs (ICHRA) offer a flexible and tax-advantaged approach to securing health coverage. Unlike a flexible spending account (FSA) or a health savings account, an ICHRA enables employees to use pre-tax dollars for acquiring individual health insurance coverage, rather than saving for future medical expenses.

Individuals must have an existing health insurance coverage to be eligible for an ICHRA. It can provide reimbursement for eligible health care expenses, including copayments and deductibles, to assist in covering out-of-pocket medical costs. Furthermore, the impact of an ICHRA on eligibility for premium tax credits under the Affordable Care Act is contingent upon whether the ICHRA provided by the employer adheres to specific affordability standards and if the employee chooses to enroll in the coverage.

Understanding Qualified Small Employer HRAs

Qualified Small Employer HRAs (QSEHRA) are tailored for small businesses with less than 50 full-time employees. They enable these businesses to contribute a tax-free amount up to an annual limit for the reimbursement of individual health insurance premiums and medical expenses.

A prerequisite for QSEHRA eligibility is enrollment in a health plan that satisfies the minimum essential coverage requirements. In 2024, these limits increase to $6,150 per individual and $12,450 per family, and the reimbursements are considered tax-free for the employees and tax-deductible for the employers.

Demystifying Excepted Benefit HRAs

Excepted Benefit HRAs (EBHRA) function as a means for employers to fund supplementary medical expenses like vision or dental coverage, coinsurance, and copayments. The catch is, they are permissible only in conjunction with an employer-sponsored group health plan, such as a high deductible health plan.

Eligible expenses for reimbursement under an EBHRA include short-term health insurance premiums, dental and vision insurance premiums, as well as other qualified medical expenses.

Eligible Expenses Covered by HRAs

HRAs deliver comprehensive coverage across a broad range of eligible expenses. They reimburse various medical expenses such as doctor visits, laboratory fees, chiropractor services, prescriptions, and home medical equipment. Additionally, eligible expenses may include COVID-19 safety-related items like at-home tests and personal protective equipment such as face masks and hand sanitizers.

Furthermore, HRAs can reimburse for additional specific medical and dental expenses, including annual check-ups, prescriptions, and treatments for substance abuse. However, items for general health, such as deodorant, toothpaste, shampoo, or vitamins without a prescription, are not eligible for reimbursement under HRAs. For vision care, HRAs cover the cost of eyeglasses, contact lenses, and vision exams.

Accessing Your HRA Benefits

Employees may utilize employer-designated methods to avail HRA benefits, such as utilizing a designated debit card, accessing an online account portal, or submitting receipts for reimbursement. In addition, employees can monitor their HRA usage and balance using an online account portal or mobile app, offering real-time information about their funds.

When it comes to submitting claims for HRA reimbursement, the process typically involves automatic submission through the provider, or manual submission by the employee when necessary. The HRA special debit card operates in a manner similar to a standard debit card and is accepted at authorized merchants for the payment of eligible expenses.

Managing Unused HRA Funds

Based on the employer’s HRA policy, unused funds may be rolled over to the next year or forfeited. Employers have the authority to establish the maximum carryover amount or decide on the forfeiture of the employer funds.

However, the decision to carry forward the remaining HRA balance to the next year is determined by your employer. It is advisable to inquire with your employer about their HRA rollover policy as the year-end approaches. There may be a requirement to utilize any unused funds before the year concludes.

The Fate of Your HRA After Employment Changes

The HRA account typically terminates when an employee leaves their job, resulting in the inability to access remaining funds. Depending on the specific terms, there may be provisions for spending remaining funds, or the employee may forfeit any unused balance entirely.

However, if an individual chooses to extend their employer-provided coverage through COBRA, they are allowed to utilize HRA funds until the conclusion of their COBRA coverage. Yet, it is important to note that HRA funds cannot be transferred to a different health plan or directly carried over to a new employer’s plan.

Comparing HRAs to FSAs and HSAs

While HRAs, FSAs, and HSAs all assist in managing healthcare expenses, their functions vary. HRAs are fully funded by the employer, whereas HSAs have the potential for contributions from both the employer and the employee.

In terms of portability, HRAs are non-portable, which means that when an employee changes employers, they forfeit access to the funds. On the other hand, HSAs are owned by the individual, meaning HSA funds are retained by the individual during job transitions.

Furthermore, HRAs have eligible expenses determined by the employer, while FSAs encompass a variety of expenses such as deductibles and copayments. HSAs, on the other hand, cover medical, dental, vision, and prescription expenses.

Maximizing Benefits: How Employers and Employees Win with HRAs

Both employers and employees reap substantial benefits from HRAs. Employers have the opportunity to provide tax-free payment for employee medical expenses through an HRA. In most cases, employees who receive HRA benefits are not taxed by the IRS, resulting in tax-free reimbursement for employees utilizing an HRA.

Apart from tax benefits, HRAs offer several advantages for employers:

1. Restrict eligible reimbursements - ensures predictable expenses
2. Facilitates the establishment of a financial budget
3. Tax-deductible

Potential Limitations of HRAs

Despite their numerous advantages, HRAs also present certain limitations. Employers have the discretion to set the contribution amount and determine which expenses qualify for reimbursement under an HRA. They can also choose to exclude specific IRS-approved qualified medical expenses from their plan, consequently restricting the range of expenses for which employees can receive reimbursement.

Moreover, an HRA is not a deposit account but a reimbursement arrangement. This means employees cannot withdraw funds directly from an HRA. The process requires employees to incur the qualified medical expense first and then provide documentation to seek reimbursement, rather than withdrawing funds in advance.

Tax Implications of HRAs

From a tax perspective, HRAs provide considerable advantages. HRA reimbursements are typically not subject to taxation. According to the IRS, reimbursements from an HRA are generally not taxed for employees, unless they are for non-medical expenses, in which case they are considered deferred compensation and subject to taxation.

Furthermore, employer contributions to HRAs are not subject to taxation as income for employees.

Transitioning to an HRA: Enrollment and Plan Selection

A thorough understanding of the enrollment process is necessary when moving to an HRA. Individuals can enroll in an HRA during open enrollment, when first joining a company, or when experiencing a qualifying life event.

To initiate an individual coverage HRA that commences on January 1, one must enroll in a Marketplace plan by December 15 during the Open Enrollment period. Upon joining a company, employees are typically required to complete an application and choose a plan for their individual coverage HRA for it to become effective from the first day.

When selecting an HRA plan, employees should consider factors such as the flexibility to choose a plan that aligns with their personal and family health requirements.

HRA Portability and Longevity

When contemplating job changes or retirement, it’s vital to grasp HRA portability and longevity. In the case of HSA accounts, ownership is held by the individual, whereas with HRA accounts, ownership is held by the employer.

HRAs have some limitations and rules, including:

• Lack of portability, meaning employees lose this benefit upon leaving the company

• Specific rules and limitations determined by government regulations, which employers may further refine

• Eligible expenses for reimbursement are specified by the employer

• HRA longevity operates by providing a benefit that fosters employment longevity, especially for retirees, thereby fostering a sustained employer-employee relationship.

Summary

HRAs offer a flexible, tax-advantaged solution for managing healthcare expenses. While they come with some limitations, understanding how they work can help employees maximize their benefits and make informed decisions about their healthcare coverage.