Given recent legislation changes in the past few years, Health Reimbursement Arrangements (HRAs) have seen an uptick in interest. With new HRA plans featuring more eligible expenses, funding options, and insurance requirements, employers and benefit brokers are taking a closer look at how they can use an HRA to boost their benefits. Learn more about HRAs below.
What is an HRA?
Health Reimbursement Arrangements are employer-sponsored benefit plans that allow employees to use tax-free money to pay for qualified medical expenses. The account allows for employees to pay for eligible healthcare expenses. Unlike a Flexible Spending Account (FSA) or Health Savings Account (HSA), the employer owns the HRA and completely funds it; employees do not contribute and it does not count as taxable income.
As an employer-owned and –funded account, the company chooses how much to put into the account and what IRS-eligible expenses to cover. Also, HRAs are usually not portable; that means when the employee leaves the company, the HRA benefits stay behind. There are some exceptions, though, such as a retirement HRA.
HRA plans and setups can
vary and there are four distinct types of HRAs:
- ‘Standard’ HRA
- Individual Coverage
- Excepted Benefit HRA
- Qualified Small Employer
Each HRA plan has different regulations, particularly in
regards to funding and eligible expenses.
Under a standard HRA, the employer chooses how much to
contribute to the account. There is no federal limit. Companies of all sizes
may offer a standard HRA plan, and the plan must be offered to all employees on
the same terms.
Under Section 213 of the Internal Revenue Code, HRAs can reimburse any expense considered as a qualified medical expense. Since employers own the HRA plan, they have the authority to pick which medical expenses they will reimburse. HRAs can cover common medical expenses such as deductibles, coinsurance, copays, prescriptions, dental and vision expenses. One thing a ‘standard HRA’ cannot cover is health insurance premiums.
Individual Coverage HRA (ICHRA)
Approved in 2019, the ICHRA is a new HRA plan type and
companies of all sizes may offer one. Like the standard HRA, there is no minimum
or maximum federal limits on contributions; the employer chooses how much to
fund. Employers may also use criteria to include or exclude certain groups of
employees for participation.
What makes the ICHRA unique is that it allows employees to pay for individual health insurance premiums (not group coverage provided by the employer). It can also cover other IRS-approved expenses, chosen by the employer.
Excepted Benefit HRA (EBHRA)
Along with the ICHRA, the Excepted Benefit HRA was also approved in 2019. Companies of any size may offer an EBHRA, which covers “excepted” benefits only, such as copays, deductibles, and premiums for vision and dental. EBHRAs can also cover COBRA insurance, long-term care, and short-term care. It must be offered to every employee on the same terms.
The IRS posts annual contribution limits for the EBHRA. Companies can only fund the account up to this limit.
Qualified Small Employer HRA (QSEHRA)
With the passage of
the Cures Act in December 2016, small employers (those with fewer than 50
employees) without a group health plan can offer a QSEHRA for health
insurance premium reimbursement. A QSEHRA can also cover employer chosen
expenses that are approved by the IRS.
Employers may exclude seasonal and part-time employees, and employees under age 25. In addition, there is an annual limit on QSEHRA funding. Learn more about QSEHRAs.
Are HRA plans
In general, the IRS
does not tax employees who receive HRA benefits. There are exceptions, however.
Under an HRA,
employers are not allowed to reimburse employees for any non-medical expenses.
The IRS considers reimbursement for non-qualified expenses as deferred
compensation, making those funds taxable. Moreover, if an employer does
reimburse non-medical expenses, all payments received from the HRA plan become
taxable; this includes those considered an eligible medical expense.
In addition, certain plan designs can trigger a shift from non-taxable to taxable income. These include HRA plans that:
- Comply with the “medical expenses only” requirement, but reimburse employees for some or all of their unused money at the end of the year
- Provide a death benefit to employees’ dependents from unused funds, and allow the funds to be used for non-medical expenses
- Allow unused account dollars to be applied to other company benefits, such as a 401(k) contribution
HRA plans offer many advantages to employers and employees, and give companies a way to offer competitive benefits. Talk a third party administrator about adding HRAs to your benefits portfolio.