Health Reimbursement Arrangement (HRA): What It Is, How It Works

Healthcare costs continue to rise, prompting employers and employees alike to seek innovative solutions for managing expenses while maintaining quality care. One such solution gaining popularity is the Health Reimbursement Arrangement (HRA). This article serves as a comprehensive guide to understanding HRAs, exploring what they are, how they work, their benefits, and considerations for both employers and employees.

A Health Reimbursement Arrangement (HRA) is an employer-sponsored benefit plan that allows employers to reimburse employees for qualified medical expenses tax-free. Unlike Flexible Spending Accounts (FSAs) or Health Savings Accounts (HSAs), which are funded by employee contributions, HRAs are funded solely by the employer. Employers establish HRAs to help employees offset out-of-pocket medical expenses not covered by their health insurance plans, such as deductibles, copayments, coinsurance, and certain other qualified medical expenses. HRAs are typically offered in conjunction with a High Deductible Health Plan (HDHP) or other group health insurance plan as part of an employee benefits package.

Health Reimbursement Arrangements (HRAs) come in various forms, each tailored to meet specific needs and circumstances. The Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is designed for small employers with fewer than 50 full-time equivalent employees and allows them to reimburse employees tax-free for eligible medical expenses, including health insurance premiums, up to specified annual limits.

On the other hand, the Individual Coverage HRA (ICHRA) is available to employers of all sizes and enables them to reimburse employees tax-free for individual health insurance premiums and other qualified medical expenses. This type of HRA is particularly beneficial for employers looking to provide health benefits to employees without offering a group health insurance plan.

Additionally, Excepted Benefit HRAs (EBHRA) are a type of HRA that provides limited reimbursement for certain qualified medical expenses, such as dental and vision expenses, and is available as an ancillary benefit alongside a traditional group health plan. Each type of HRA offers unique features and benefits, allowing employers to customise their health benefits offerings to meet the diverse needs of their workforce.

The operation of an HRA begins with the employer setting aside a specified amount of money each year to fund the arrangement. Employees incur eligible medical expenses throughout the year and submit reimbursement requests to the employer along with supporting documentation, such as receipts or Explanation of Benefits (EOB) statements. The employer reviews and approves eligible expenses and then reimburses the employee from the HRA funds. Reimbursements from an HRA are tax-free for both the employer and the employee, making them a valuable tool for reducing healthcare costs. Unlike FSAs, which have a “use it or lose it” rule, any unused funds in an HRA can typically roll over to the next plan year, subject to plan design.

HRAs offer several benefits for both employers and employees. For employers, HRAs provide a flexible and customisable way to offer health benefits to employees while controlling costs. Employers can tailor HRA plans to meet the specific needs of their workforce, adjusting contribution amounts, coverage options, and reimbursement rules as needed. Additionally, contributions to HRAs are tax deductible for employers, providing potential tax savings. For employees, HRAs offer a valuable financial resource to help offset out-of-pocket medical expenses. Reimbursements from an HRA are tax-free, providing immediate savings on eligible medical costs. Additionally, unused funds in an HRA can typically roll over from year to year, allowing employees to accumulate savings for future healthcare needs.

There are several types of HRAs, each with its own features and eligibility requirements. The most common types of HRAs include:

• • Integrated HRA: Integrated HRAs are paired with a group health insurance plan, such as a high deductible health plan (HDHP), and are typically funded solely by the employer. Employees can use HRA funds to pay for eligible medical expenses not covered by their insurance plan, such as deductibles, copayments, and coinsurance.
  • Qualified Small Employer HRA (QSEHRA): QSEHRAs are designed for small employers with fewer than 50 full-time equivalent employees who do not offer group health insurance coverage to their employees. QSEHRAs allow employers to reimburse employees tax-free for eligible medical expenses, including health insurance premiums, up to specified annual limits.
  • Individual Coverage HRA (ICHRA): ICHRAs are a type of HRA that allows employers of all sizes to reimburse employees tax-free for individual health insurance premiums and other qualified medical expenses. ICHRAs are particularly beneficial for employers looking to provide health benefits to employees without offering a group health insurance plan.

When implementing an HRA, employers should consider several factors to ensure the success and compliance of the plan. Key considerations include plan design, contribution amounts, eligibility criteria, reimbursement rules, and administrative requirements. Employers must also comply with applicable regulations, such as the Affordable Care Act (ACA) and Internal Revenue Service (IRS) guidelines, to ensure that their HRA plan remains in compliance.

Employees should carefully review the details of their employer’s HRA plan to understand how it works and how they can maximise its benefits. Key considerations for employees include eligibility criteria, covered expenses, reimbursement rules, and rollover provisions. Employees should also keep detailed records of their medical expenses and submit reimbursement requests promptly to ensure timely payment.

Health Reimbursement Arrangements (HRAs) are typically funded solely by the employer, who sets aside a specified amount of money each year to fund the arrangement. This funding can be tailored to the needs and budget of the employer, providing flexibility in determining the level of support offered to employees for medical expenses. Additionally, HRAs are often portable, meaning that employees can typically retain any unused funds in their HRA account even if they leave their job or retire. This portability feature provides employees with added flexibility and control over their healthcare benefits, allowing them to continue accessing funds for eligible medical expenses even after transitioning to a new employer or retiring. Overall, the combination of employer funding and portability makes HRAs a valuable tool for both employers and employees in managing healthcare costs and promoting financial security.

Health Reimbursement Arrangements (HRAs) offer several tax advantages for both employers and employees. Contributions made by employers to fund HRAs are tax deductible, providing potential tax savings for the employer. Additionally, reimbursements received by employees from an HRA are typically tax-free, meaning that they do not count as taxable income. This tax-free treatment applies to eligible medical expenses incurred by employees, such as deductibles, copayments, coinsurance, and certain other qualified medical expenses. By leveraging HRAs, employers can provide valuable health benefits to their employees while enjoying tax advantages. Likewise, employees benefit from tax-free reimbursements, reducing their out-of-pocket healthcare costs and maximising the value of their employer-provided health benefits. Overall, the tax advantages associated with HRAs make them an attractive option for both employers and employees seeking to manage healthcare expenses efficiently.

Health Reimbursement Arrangements (HRAs) offer a flexible and tax-efficient way for employers to provide health benefits to their employees while controlling costs. By reimbursing employees for eligible medical expenses tax-free, HRAs help offset out-of-pocket healthcare costs and provide valuable financial support. Employers and employees alike can benefit from the flexibility, customisation, tax advantages offered by HRAs, making them a valuable tool for managing healthcare expenses and promoting employee wellbeing. With careful planning and compliance with applicable regulations, HRAs can be a valuable addition to an employer’s benefits package and a valuable resource for employees seeking to manage their healthcare costs effectively.