Health reimbursement account

What Is a Health Reimbursement Account?

A health reimbursement account (HRA) is an employer-funded arrangement that reimburses employees for out-of-pocket medical expenses and, in some cases, health insurance premiums. As a component of employee benefits, HRAs are a type of tax-advantaged account, meaning contributions are typically made by the employer on a pre-tax basis, and reimbursements for qualified medical expenses are generally tax-free to the employee. This structure allows employers to offer a flexible benefit while helping employees manage healthcare costs. Funds in a health reimbursement account are owned by the employer, not the employee, and are generally not portable if an employee leaves the company, although specific rules can vary by plan design.

History and Origin

The concept of employers assisting with healthcare costs has roots in the early 20th century. However, the formal establishment and recognition of health reimbursement accounts (HRAs) by the Internal Revenue Service (IRS) occurred in 2002. At that time, the IRS issued Notice 2002-45, which provided foundational guidelines for these arrangements, clarifying that employers could contribute funds, and reimbursements for qualified medical expenses would be tax-free for employees and tax-deductible for employers.²⁰,¹⁹ This guidance paved the way for HRAs to become a more structured and widely adopted component of employer-sponsored healthcare benefits.¹⁸ Subsequent legislation, such as the 21st Century Cures Act, further expanded the flexibility of HRAs by introducing Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) for small businesses. More recently, in 2019, the U.S. Departments of Labor, Health and Human Services, and the Treasury finalized rules that expanded the use of HRAs, including allowing them to be integrated with individual health insurance coverage through Individual Coverage HRAs (ICHRAs).¹⁷

Key Takeaways

• A Health Reimbursement Account (HRA) is an employer-funded plan that reimburses employees for qualified medical expenses and, sometimes, insurance premiums.
• Contributions made by the employer and reimbursements received by the employee for qualified medical expenses are generally tax-free.
• Unlike other health accounts, HRAs are owned by the employer, and unused funds may or may not roll over, depending on the plan design, but they are typically not portable when employment ends.
• HRAs offer employers a flexible way to provide healthcare benefits and can be designed in various forms to suit different organizational needs.
• IRS Publication 969 provides detailed information on health reimbursement accounts alongside other tax-favored health plans.¹⁶,¹⁵,¹⁴

Interpreting the Health Reimbursement Account

A health reimbursement account is a valuable tool within an overall compensation package. For employees, understanding the maximum reimbursement amount, what expenses are eligible, and whether unused funds roll over is crucial. Since HRAs are funded solely by the employer, they effectively reduce an employee's out-of-pocket costs for healthcare. The specific terms of an HRA are set by the employer, and they can vary significantly. Some HRAs may cover a wide range of medical costs, including deductible expenses, copayments, and prescriptions, while others might be more limited. It is important for participants to review their plan documents to understand the full scope of benefits.

Hypothetical Example

Consider Sarah, an employee at Tech Innovations Inc. Her employer offers a health reimbursement account with a $2,000 annual allowance. In January, Sarah visits her doctor and incurs a $150 copayment. In March, she has a minor surgical procedure with a $500 out-of-pocket cost after her group health plan pays its portion. Throughout the year, she also spends $350 on prescription medications.

Sarah submits receipts for these expenses to her employer's HRA administrator.

• January: $150 copayment reimbursed. Remaining HRA balance: $1,850.
• March: $500 surgical cost reimbursed. Remaining HRA balance: $1,350.
• Throughout the year: $350 in prescription costs reimbursed. Remaining HRA balance: $1,000.

By the end of the year, Sarah has used $1,000 of her HRA funds, leaving $1,000 unused. If her company's HRA plan allows for a carryover, this $1,000 would be added to her allowance for the next year. If not, the remaining $1,000 would be forfeited. This example illustrates how a health reimbursement account directly offsets healthcare costs for the employee.

Practical Applications

Health reimbursement accounts are primarily used by employers as a flexible way to offer healthcare benefits without the employee incurring any direct premium costs or having to make pre-tax contributions themselves. They are a form of employer-sponsored benefit that can supplement traditional group health plans or, in specific contexts like QSEHRAs or ICHRAs, allow employees to purchase individual health insurance premiums and other medical expenses.¹³

For employers, HRAs offer control over healthcare spending, as the employer sets the annual contribution limit. For instance, an employer might offer a high-deductible health plan (HDHP) paired with an HRA to help employees cover the higher deductible amounts.¹²,¹¹ This strategy can lead to lower insurance premiums for the employer while still providing robust coverage for employees. The U.S. Department of Labor provides guidance and FAQs regarding the implementation of HRAs under various regulations, including the Affordable Care Act (ACA).¹⁰,⁹

Limitations and Criticisms

While health reimbursement accounts offer significant advantages, they also have limitations. One primary criticism from an employee perspective is the lack of portability; typically, if an employee leaves their job, any unused funds in the HRA are forfeited since the account is employer-owned. This contrasts with a Health Savings Account (HSA), which is owned by the employee and fully portable. Additionally, HRAs are generally subject to strict rules under the Affordable Care Act and other federal regulations, particularly regarding integration with other health coverage and the prohibition of annual limits on essential health benefits.⁸,⁷ Employers must ensure their HRA plans comply with these complex rules to avoid potential penalties. Certain types of HRAs, such as Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) and Individual Coverage HRAs (ICHRAs), were created to address some of these integration challenges and expand the utility of HRAs.⁶

Health Reimbursement Account vs. Flexible Spending Account

Both a health reimbursement account (HRA) and a Flexible Spending Account (FSA) allow individuals to pay for qualified medical expenses with tax-free funds. However, there are fundamental differences:

The "use-it-or-lose-it" rule for FSAs, which dictates that most unused funds are forfeited at year-end, is a significant distinction from HRAs, which often allow for unlimited carryover of funds, though this is at the employer's discretion.

FAQs

Can an employee contribute to a health reimbursement account?

No, a health reimbursement account is funded solely by the employer. Employees are not permitted to contribute to an HRA under current regulations, making it a distinct type of defined contribution plan for healthcare expenses.⁵,⁴

What happens to unused HRA funds?

The disposition of unused HRA funds depends entirely on the specific plan design established by the employer. Some health reimbursement accounts allow unused amounts to roll over from year to year, accumulating over time. Others may have a "use-it-or-lose-it" provision, similar to an FSA, where unused funds are forfeited at the end of the plan year. Upon termination of employment, HRA funds are typically forfeited, as the account is owned by the employer.³

Are HRA reimbursements taxable?

Reimbursements from a health reimbursement account for qualified medical expenses are generally not considered taxable income to the employee. This tax-free status is a key benefit of HRAs. The employer's contributions to the HRA are also tax-deductible for the business.²,¹

Can an HRA be used for anything other than medical expenses?

No, health reimbursement accounts are specifically designed to reimburse employees for qualified medical expenses, as defined by IRS regulations. This includes a wide range of healthcare services, prescriptions, and in some cases, health insurance premiums, but not general living expenses or non-medical purchases.

How does an HRA differ from an HSA?

A key difference between an HRA and a Health Savings Account (HSA) is ownership and portability. HRAs are employer-owned, and funds are typically forfeited if you leave your job. HSAs are employee-owned accounts that are portable, meaning you keep the funds even if you change employers. HSAs also require enrollment in a high-deductible health plan (HDHP) to be eligible, whereas HRAs can be offered with various health plans. Contributions to an HSA can come from both employer and employee, while HRAs are solely employer-funded. HSAs also allow for investment of funds and can be used for retirement planning, whereas HRAs do not.