All About HRAs
Health reimbursement arrangements (HRAs) are plans designed to help employers and employees lower health care costs. Allowed under sections 105 and 106 of the Internal Revenue Code, HRAs enable employers to reimburse employees for out-of-pocket medical expenses not covered by insurance. HRAs are often combined with high-deductible health plan coverage.
HRAs are employer-paid health care arrangements that are often paired with high-deductible health plans to lower health care costs. Typically, an employer creates an unfunded HRA account for each participating employee and reimburses the employee up to the HRA’s account balance for substantiated medical expenses not covered by insurance, such as insurance deductibles and copayments.
If an employer chooses to offer an HRA, it establishes eligibility rules, a maximum reimbursement amount and a list of eligible expenses. (This list must comply with section 213(d) medical expenses as defined in the Internal Revenue Code.) After incurring medical expenses, employees submit claims to the HRA administrator for reimbursement.
For employers, all HRA reimbursements are tax-deductible. For employees, contribution amounts made by employers are tax-free and reimbursements for medical expenses are also tax-free.
Employers benefit from offering HRAs by reducing insurance costs and restructuring health benefits. By moving employees to high-deductible health plans, costs are more predictable
and controlled as employees are encouraged to become better health care consumers. HRAs motivate employees to make better health care and future planning decisions.
Employees benefit from the protection HRAs provide against catastrophic medical costs. HRA funds can be used to cover a wide range of health care expenses, but unlike health flexible spending accounts (FSAs), HRAs can be designed to allow funds to be carried over year to year. However, unused HRA amounts may not be cashed out—only carried over to the following year. Also, employers may establish account caps on total HRA account balances and include rollover maximums on carryover balances.
The following expenses are considered ineligible for HRA reimbursement:
If you are considering implementing health reimbursement accounts (HRAs) or high deductible health plans (HDHPs) with HRAs, you should consider several things first, including your objectives and possible plan designs. Below are questions to think about if you are an employer considering HRAs or HDHP/HRAs.
Evaluate your objectives for your benefits package and how HDHP/HRAs contribute to your goals.
You should also consider different aspects of plan design before implementing an HDHP/HRA.
1.How should an HRA be offered with other group health coverage?
Two types of integration methods—one method imposes a “minimum value” condition on the non- HRA health plan coverage, and the other method limits the types of expenses that may be reimbursed under the HRA. Under both integration methods:
Who will be eligible to participate? As long as the HRA passes nondiscrimination testing and the ACA’s integration requirements (if applicable), employers have flexibility when it comes to establishing the HRA’s eligibility rules.
What expenses are reimbursable? If an HRA is offered with an HDHP/HSA, HRA coverage must be limited to certain expenses, for example, preventive care, or designed to permit reimbursements after the HDHP deductible has been met. Expenses an HRA can reimburse are limited to qualified medical expenses; however, an employer may choose to be more restrictive on what the plan will reimburse. Also, if the ACA’s minimum value integration method is not used, reimbursements may be limited to copayments, coinsurance, deductibles and premiums under the non-HRA group coverage, as well as medical care that does not qualify as “essential health benefits.”
How much will the employer contribute? There is no specified cap on the amount an employer is allowed to contribute to an HRA. Employer contributions to an HRA do not have to be the same for all employee groups (for example, individual coverage, family coverage) provided the plan complies with nondiscrimination rules.
How will the HRA be funded? HRAs must be funded solely by the employer. Typically, reimbursements will be made from employer general assets.
Will carryovers be allowed? HRAs may allow carryovers of unused account balances, but they don’t have to. Employers can allow unlimited carryovers or put limits on carryovers.
How will reimbursements be processed? Because substantiation is required for HRA reimbursements, and because of privacy concerns, employers may consider hiring a third-party administrator (TPA) to substantiate claims. Employers should complete a due diligence of TPAs and have service agreements and business associate contracts reviewed by counsel. Employers should also consider if they want caps on reimbursements. If the employer also sponsors a health FSA, consider how the claims will be ordered.
Design employee communication, education and support tools.
Adopt a plan document and distribute a Summary Plan Description (SPD) to employees.
Marty has spent most of the last 20 years developing software in the marketing space and creating pathways for software systems to talk to each other with high efficiency. He heads our digital marketing efforts as well as oversees any technology implementations for our clients. As a partner, Marty is also responsible for internal systems in which help our team communicates with each other and our clients.