Important Benefit in the New Era of Health Care
As insurance premiums continue to experience tremendous increases each year, employers are facing tough decisions regarding their health care options. Employers are desperately seeking ways to lower health care costs while maintaining health care for their employees.
HRAs go by a number of names, such as personal care accounts or consumer-driven health care plans. Whatever label you give them, a Health Reimbursement Arrangement (HRA) is a tax-favored, employer sponsored benefit program approved by the IRS that reimburses employees for qualified medical care expenses not already paid for by the employer’s health plan. The HRA is a great way to help stretch your healthcare budget because it allows you to pay for healthcare expenses with money that is not taxed.
How the HRA Works
The IRS designed the HRA to be very flexible. This flexibility means that there are not a lot of regulations to adhere to but also not a lot of “standards” that apply across all HRAs. This flexibility helps ensure employers can design programs that best meet their needs and the needs of their employees.
In general, employers contribute money to the HRA to pay for medical expenses up to a certain amount. Eligible items may be limited or can include all medical expenses allowed by the IRS. Employers define what the funds can be used for – i.e., specified out-of-pocket expenses such as deductibles and copayments. Unspent funds generally revert back to the employer, however the plan can be designed to carry funds (or a portion of them), forward to pay for claims in future plan years.
HRAs provide control, flexibility and simplicity:
Control:
- Employers pay when expense is incurred, and only to extent of contributions.
- Funds stay with the employer when the employee leaves the company (or the plan can be designed to be portable into retirement or taken when an employee leaves employment).
Flexibility:
- Employer selects maximum contribution.
- No restrictions on the type of health insurance it is paired with; may be a stand alone.
- Contributions may vary by class of employees.
Simplicity:
- Funds paid from company bank account.
- Employee submits receipts for payment.
- Plan is driven by broad IRS guidelines and company plan design.
Key features of an HRA
- Eligibility is based on employer design
- Can reimburse out-of-pocket medical expenses and certain insurance premiums not reimbursed elsewhere
- Can permit carryover of unused amounts
- Can permit account to spend down
- Often offered in conjunction with a high deductible health plan but can also be a stand-alone plan
- HRA must be paid for solely by the employer
- May limit reimbursements to specific services
- No legal limit on annual employer HRA contributions
- No requirement to make additions in annual increments or make annual amount available throughout the year
- Certain rules apply when an HRA is paired with HSA or FSA
- HRAs do not impact design of HRA like it does with an HSA
Tax advantages of HRAs
- Employer contributions are deductible under Code Section 162 (ordinary, reasonable and necessary business expenses)
- Employer contributions are excludable from employee’s taxable income, not subject to income or employment tax withholding
- If HRA is funded, using a tax-exempt vehicle separate from employer’s general assets, buildup in the HRA is tax-free
- Distributions for qualified medical expenses are tax-free (nonmedical distributions are not permitted)