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.

What are HRAs?

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.

How do HRAs work?

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.

Tax Implications

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.

Advantages

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.

What expenses are not eligible for reimbursement through HRAs?

The following expenses are considered ineligible for HRA reimbursement:

• Medical expenses not defined as eligible under an employer’s plan
• Medical expenses that do not meet the definition of “medical care” under Internal Revenue Code section 213(d)
• Medical expenses incurred by an employee, employee’s spouse or any eligible dependents prior to the effective date in the program
• Medical expenses that can be reimbursed to an employee through another source, such as group health insurance

Key HRA Decision Points

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.

Determining Objectives for the Company

Evaluate your objectives for your benefits package and how HDHP/HRAs contribute to your goals.

• Is your primary goal to save money on health costs or to move toward employee-driven health care decisions?
• What is your strategic timeline for making these changes?
• Do you have existing educational resources to help employees understand the effects of health care premium costs on your business?
• How will your choice of health care plans affect your employee recruitment and retention efforts?
• What is your corporate culture today and how well does your organization embrace change? Company characteristics that influence the ability to introduce HRAs include a paternalistic culture, high turnover, communication ability, and recent major changes in workforce or benefits.
• What employee characteristics would tend to make employees more interested in one approach or another? Age, gender, time at company, personal situations, number of dependents or salary? How well do you know what your employees want?

9 Key Plan Design Questions

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?

• Stand-alone HRA

  • Due to the Affordable Care Act’s (ACA) market reforms, most stand-alone HRAs are prohibited.
  • Retiree-only HRAs qualify for an ACA exemption and are still permitted.
  • Special stand-alone HRA designs (qualified small employer HRAs and, beginning in 2020, individual coverage HRAs) allow employers to reimburse individual health insurance premiums, subject to specific design requirements.

• HDHP/HRA design

  • High flexibility
  • Employer can limit the availability of HRA COBRA coverage to qualified beneficiaries who also elect HDHP COBRA coverage.
  • Under the ACA, most HRAs must be integrated with other group health plan coverage (for example, HDHP 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:

  • The employer sponsoring the HRA must offer a group health plan (other than the HRA) that does not consist solely of excepted benefits (for example, an HDHP).
  • Employees receiving the HRA must actually be enrolled in another group health plan that does not consist solely of excepted benefits.
  • The HRA must be available only to employees who are actually enrolled in another group health plan.
  • Employees must be offered the opportunity to permanently opt out of and waive future reimbursements from the HRA at least annually and upon termination of employment (if the HRA is not forfeited when employment terminates).

2. 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.

3. 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.”

4. 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.

5. How will the HRA be funded?  HRAs must be funded solely by the employer. Typically, reimbursements will be made from employer general assets.

6. 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.

7. 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.

8. Design employee communication, education and support tools.

9. Adopt a plan document and distribute a Summary Plan Description (SPD) to employees.