How does a Health Reimbursement Arrangement (HRA) help your business?

Updated: Nov 2

What Is a Health Reimbursement Arrangement (HRA)?

Employees are eligible for reimbursement for qualified medical expenses and, in certain cases, premiums under a health reimbursement arrangement (HRA). These plans allow employers to claim a tax deduction for reimbursements they make, and employees receive the reimbursements tax-free.


KEY TAKEAWAYS

  • Certain medical costs, as well as insurance premiums, are reimbursed by HRAs.

  • Employees do not fund HRAs; employers do.

  • HRAs are not portable benefits; employees lose them upon leaving the company.

  • Several government rules determine which expenses are reimbursable by employers, but employers are free to refine them further.

  • Health insurance premiums, eligible medical expenses, and vision and dental insurance premiums may be reimbursed via HRAs, depending on the type.

How a Health Reimbursement Arrangement (HRA) Works

Health reimbursement arrangements are plans implemented by employers for the purpose of covering medical expenses for their employees. Employers determine how much money they will put in a health plan, and employees claim reimbursement for actual medical expenses up to the amount of the contribution. The HRA contribution must be the same for everyone in the same class.

HRAs are not accounts. Medical expenses cannot be paid from funds withdrawn by employees in advance. These expenses must be incurred first and then reimbursed. When an HRA debit card is provided by the employer, reimbursement can be made at the time of service.

Any subsequent health bills must either be paid out of pocket or from the funds in a flexible spending account (FSA), or health savings account (HSA) if the employee has a high-deductible health plan (HDHP).


Health reimbursement arrangements (HRAs) don't cover pregnancy clothes, gym memberships, marriage counseling, and childcare.


Types of HRAs

Health reimbursement arrangements can take a variety of forms.

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

Companies that tend to employ less than 50 employees on a full-time basis may qualify for Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs). QSEHRAs are also known as small business HRAs and can be utilized to compensate for uncovered medical costs or to reimburse them.

Internal Revenue Service (IRS) sets the yearly limits. Employees with QSEHRAs can be reimbursed by their companies for up to $5,300 in 2021, and employees with families can be reimbursed for up to $10,700. Employees are tax-free and employers are tax-deductible for the reimbursement.


Individual Coverage HRA (ICHRA)

ndividual Coverage HRAs (ICHRAs) was first offered in January 2020, so they are relatively new. Individual health insurance premiums could not be paid by HRAs previously. Employers can now offer their employees a new type of HRA in place of group health insurance, known as individual coverage HRAs.

Employees can use HRAs either on or off the health insurance marketplace of the Affordable Care Act to purchase comprehensive individual health insurance. Employees may also be entitled to reimbursements for qualified health expenses, including copayments and deductibles for individual coverage HRAs.

Whether you meet the criteria for a premium tax credit is based on the affordability of your employer's ICHRA, as well as whether you elect to enroll in or opt-out of the coverage under the Affordable Care Act.


Excepted Benefit HRAs (EBHRA)

Employers who continue to offer traditional group health insurance can also reimburse employees for qualified medical expenses up to $1,800 a year through Excepted Benefit HRAs (EBHRA). Despite declining group health insurance coverage, employees can enroll in an HRA with an "excepted benefit" but can't use the funds to buy comprehensive health insurance. However, the funds can be used for qualified medical expenses, such as short-term health insurance, dental or vision insurance premiums.


Benefits of Health Reimbursement Arrangements

Among the medical expenses that can be covered by HRAs are prescription medications, insulin, an annual physical, crutches, birth control pills, meals paid for during treatment, psychological or psychiatrist services, a substance abuse treatment program, travel to and from a medical facility, and others. Through the aforementioned individual coverage HRA (ICHRA), employees can also purchase comprehensive individual health insurance with pretax dollars.

Employees can leverage the money within their HRAs to cover medical, dental, and vision expenses for their spouses and dependents.


Limitations of Health Reimbursement Arrangements

An HRA covers only medical and dental expenses that meet certain criteria. Internal Revenue Service (IRS) defines medical expenses as costs incurred for treating or preventing diseases. Their definition does not include expenses to maintain general health, such as vitamin supplements.

In addition, there are certain expenses that do not qualify as necessary medical costs, such as teeth whitening, maternity wear, funeral services, health club membership fees, controlled substances, child care for a healthy baby, marriage counseling, and medicines from other countries.

Despite the fact that certain medical expenses are qualified by the IRS, employers can still exclude them. A company's HRA plan will outline its employees' reimbursable medical expenses.

Taxpayers were notified that COVID-19 tests at home and personal protective equipment (hand sanitizer, face masks, and earplugs) are eligible for medical expenses that are covered under flexible spending arrangements, health savings accounts, and health reimbursement arrangements (HRAs).


Pros

  • Medications, yearly physical assessments, and birth control pills are just a few of the things which can be paid for with the account

  • Individual health insurance can be purchased with pretax dollars

  • Provides reimbursements after employees have paid certain medical and insurance premiums

Cons

  • These funds can't be used to cover non-necessary costs, such as teeth whitening, funeral arrangements, or non-prescription medications.

  • Establishes the amount of money that pays into the plan, which is determined by the employer

  • They cannot withdraw funds before paying expenses; they must pay first and then wait for reimbursement


Health Reimbursement Arrangements vs. Other Arrangements

Both FSAs and HRAs offer reimbursement for expenses. If an employee has both, and an expense qualifies for both reimbursement plans, he cannot choose which will cover it. The costs will instead be covered by the plan that the employer has established to pay first. Any future eligible medical expense that is reported for reimbursement will be covered by the secondary plan when this primary plan has been exhausted.

In this section, we will evaluate two options for meeting out-of-pocket medical costs.


FSA

The FSA utilizes pre-tax salary to fund it, and unlike HRA's, each employee determines how much money they want to invest annually, up to $2,750 in 2021.

An employer may elect to carry over unused HRA funds to the next year at their discretion. In most cases, unused FSA funds cannot be carried over to the following plan year, though employers may allow up to $550 to be carried over from one plan year to the next in limited circumstances or offer a grace period.

Because of the COVID-19 pandemic, FSA rules regarding unused funds were temporarily changed. After the Consolidated Appropriations Act, 2021, was signed into law at the end of December 2020 by former President Donald Trump, employees can roll over their healthcare FSA funds up to the annual limit of $2,750 from 2020 to 2021 and 2021 to 2022.


HSA

The only difference between an HRA and a health savings account (HSA) is that a health savings account (HSA) is fully vested and does not forfeit funds at the end of the year. For medical and dental expenses, HSAs are used in conjunction with high-deductible health plans (HDHPs). The account is funded by the employer or employee and cannot be used to cover insurance premiums like a flexible spending account. HSAs are kept by employees if they change employers, unlike HRAs and FSAs.


Special Considerations

HRA Funding and Portability

Employees' health reimbursement arrangements are solely funded by their employers, who are also responsible for determining the maximum annual contribution. HRA contributions are determined by the employers, except that each employee in the same class of employment must receive the same amount, as above noted. Employees with dependents or long work history may receive more benefits.

HRAs that are not expended by year's end can be rolled over to the following year, although employers are allowed to impose a maximum rollover amount.

In addition, the HRA does not roll with an employee who is fired or leaves the company to work for another company. Unlike HSAs, which are portable, it's not portable.


HRA Tax Advantages

The HRA offers employers the benefit of being 100% tax-deductible on reimbursements. In lieu of expensive retiree health care, an employer may cover retiree health costs through an HRA. The plans are also predictable for employers since they are fully funded by employers. This gives them an idea of their maximum health benefit reimbursements for the year.

It allows employees to pay for a variety of health-related costs not covered by their health insurance. HRAs may also be used for medical, dental, and vision insurance premiums, depending on the type. Tax-free reimbursement is also available up to a maximum amount for a coverage period. Businesses may offer their employees the option of other employer-provided health benefits, such as a flexible spending account, along with a health reimbursement arrangement.


HRA FAQs

The following questions are frequently asked.

What is a Health Reimbursement Arrangement (HRA)?

HRAs are plans established by employers to cover employee medical expenses.


What is the limit on HRA contributions?

In the law, these amounts are tied to inflation, so we expect them to go up a little bit every year. And in fact, since its inception, we’ve seen a steady increase annually of about $100 for individuals and $150-200 for families.

For 2021 the contribution rates are as follows:

  • Individual $5300 or $441.67/month

  • Family $10,700 or $891.67/month


HRAs: How Do They Work?

Employers determine the amount of money that will go into their health care plans; employees can claim reimbursement for qualified medical expenses up to the designated sum. Reimbursements made through these plans are usually tax-deductible for employers, and reimbursements made to employees are usually tax-free.


How does an HRA differ from an HSA?

Health reimbursement arrangements (HRAs) are a kind of employee benefit that allows companies to reimburse employees for certain health coverage premiums and eligible medical expenses tax-free. People who have high-deductible health plans (HDHPs) and wish to save money for their qualified medical expenses can open a health savings account (HSA).


What are the rules for cashing out my HRA?

You cannot. Employers determine the amount of HRA money that may be carried over from one year to the next, but it cannot be withdrawn.


What are the requirements for HRA reimbursement?

An annual check-up, prescriptions, or substance abuse treatment are among the examples of "necessary" medical and dental expenses.


The Bottom Line

Employers use health reimbursement arrangements (HRAs) to reimburse employees for certain approved medical and dental expenses. Employees can be reimbursed for a specific amount determined by the employer, up to a limit imposed by the yearly plan. Employers can seek a tax deduction for the reimbursements they make to employees. Employees receive tax-free reimbursements.

Small companies employing less than 50 full-time employees may qualify for a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). Employees can purchase individual health insurance with pretax dollars through Individual Coverage HRAs (ICHRAs). Health expenses, such as coinsurance and deductibles, can be reimbursed to employees who have an ICHRA.


If you have any questions or need help deciding between an HRA or HSA, please contact us at info@bentonoakfield.com or call us at (212) 365-4553.

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