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Health reimbursement account|

What Is a Health Reimbursement Account?

A health reimbursement account (HRA), also known as a health reimbursement arrangement, is an employer-funded plan that reimburses employees for eligible medical expenses79. Belonging to the broader category of employee benefits, HRAs offer a tax-advantaged way for businesses to help employees manage their healthcare costs78. Unlike other health accounts, only the employer can contribute to an HRA; employees cannot make contributions77. Funds within a health reimbursement account are used to pay for qualified medical expenses, which may include certain premiums, deductibles, and copayments76.

History and Origin

The concept of reimbursing employees for healthcare expenses gained traction as early as the 1960s, with employers creating informal "healthcare arrangements" to help workers cover out-of-pocket costs74, 75. These early arrangements laid the groundwork for modern HRAs. The formal recognition and establishment of health reimbursement accounts occurred in 2002 when the Internal Revenue Service (IRS) issued guidance through Revenue Ruling 2002-41 and Notice 2002-4571, 72, 73. This guidance clarified the criteria under which HRAs could operate, confirming that they must be employer-funded, used for substantiated medical expenses, and that reimbursements would be tax-free for employees68, 69, 70.

Further legislative milestones have shaped the landscape of HRAs. The Employee Retirement Income Security Act of 1974 (Employee Retirement Income Security Act or ERISA) applies to most employer-sponsored plans, including HRAs, setting minimum standards for plan documents and employee rights65, 66, 67. The Health Insurance Portability and Accountability Act of 1996 (Health Insurance Portability and Accountability Act or HIPAA) also impacts HRAs by protecting health information privacy63, 64. In response to limitations imposed by the Affordable Care Act (ACA) in 2013, which defined HRAs as group health plans subject to ACA market reforms, new legislation expanded their use62. The 21st Century Cures Act in 2016 introduced Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs), allowing small businesses to offer tax-free reimbursements for individual insurance premiums and medical expenses61. More recently, in June 2019, the Departments of the Treasury, Labor, and Health and Human Services issued final rules to expand HRAs further, permitting Individual Coverage HRAs (ICHRAs) to integrate with individual health insurance coverage or Medicare58, 59, 60. Information on the history of these arrangements can be found from sources like PeopleKeep.

Key Takeaways

  • A health reimbursement account is a type of reimbursement arrangement funded exclusively by an employer to help employees pay for qualified medical expenses57.
  • Reimbursements received by employees from an HRA are generally tax-free, and employer contributions may be tax-deductible56.
  • Unlike a health savings account (HSA), an HRA is owned by the employer, and typically, the funds are not portable if an employee leaves the company, though some plans may allow rollovers54, 55.
  • The specific types of expenses covered by an HRA are determined by the employer's plan design, in accordance with IRS guidelines53.
  • Different types of HRAs exist, such as Integrated HRAs, Individual Coverage HRAs (ICHRAs), Qualified Small Employer HRAs (QSEHRAs), and Excepted Benefit HRAs, each with specific rules and eligibility criteria51, 52.

Formula and Calculation

A health reimbursement account does not involve a complex formula or calculation from the employee's perspective, as it is an employer-funded reimbursement mechanism. The "amount" in an HRA refers to the maximum allowance set by the employer for a given plan year.

The key aspects are:

  • Employer Contribution: The employer decides the maximum annual or monthly amount available to each employee. There are no legal limits on contributions for Integrated HRAs and ICHRAs, allowing for flexibility48, 49, 50. However, QSEHRAs have annual contribution limits set by the IRS47. For example, in 2024, QSEHRA limits are $6,150 for self-only coverage and $12,450 for family coverage46. These limits are subject to change and are updated periodically by the IRS.
  • Employee Reimbursement: Employees submit claims for qualified medical expenses they have already incurred. The reimbursement amount for a specific expense is the lesser of the actual expense or the remaining balance in the HRA.
Available HRA Balance=Initial Employer Allowance+Rollover Amount (if applicable)−Total Reimbursed Expenses\text{Available HRA Balance} = \text{Initial Employer Allowance} + \text{Rollover Amount (if applicable)} - \text{Total Reimbursed Expenses} Reimbursement Amount for Claim=min⁡(Incurred Expense,Available HRA Balance)\text{Reimbursement Amount for Claim} = \min(\text{Incurred Expense}, \text{Available HRA Balance})

Where:

  • (\text{Initial Employer Allowance}) refers to the amount the employer allocates for the current plan year.
  • (\text{Rollover Amount}) refers to any unused funds from previous periods that the employer's plan allows to carry over.
  • (\text{Total Reimbursed Expenses}) is the sum of all expenses already paid out from the HRA for the current period.
  • (\text{Incurred Expense}) is the cost of the qualified medical service or product the employee paid for.

The maximum reimbursement an employee can receive at any given time is equal to their available account balance45.

Interpreting the Health Reimbursement Account

Understanding a health reimbursement account primarily involves recognizing its nature as a financial safety net provided by an employer for healthcare costs. It's not a pre-funded account in the traditional sense, like a bank account, but rather an arrangement where the employer pledges to reimbursement employees for qualifying expenses up to a set limit44.

For an employee, a higher HRA allowance indicates greater potential financial assistance for out-of-pocket medical expenditures, such as coinsurance and deductibles. The interpretation also depends on the type of HRA offered. For instance, an Individual Coverage HRA (ICHRA) suggests the employer is enabling employees to purchase their own individual health insurance and then be reimbursed for premiums, offering significant choice42, 43. In contrast, an Integrated HRA typically supplements a traditional group health plan, helping cover gaps or high deductibles within that plan41.

It is crucial for employees to consult their specific HRA plan documents, as employers define the exact list of eligible expenses and any rollover rules39, 40. The usability and value of an HRA are directly tied to these employer-defined parameters.

Hypothetical Example

Consider an employee, Sarah, who works for Company ABC. Company ABC offers an Integrated Health Reimbursement Account to supplement its high-deductible group health plan. For the current plan year, Company ABC allocates $2,000 to Sarah's HRA. This amount is designed to help cover her out-of-pocket costs, such as the plan's $3,000 deductible.

In March, Sarah has an unexpected medical procedure that results in a bill of $1,500, which counts towards her deductible. She pays this amount directly to the provider. She then submits a claim for reimbursement to her HRA administrator, providing the necessary documentation, such as the invoice and proof of payment.

The HRA processes her claim and reimburses her the full $1,500 because it is less than her remaining HRA balance ($2,000). Her HRA balance is now reduced to $500 ($2,000 - $1,500).

Later in the year, in August, Sarah incurs another $700 in prescription costs. She submits these receipts for reimbursement. Since her remaining HRA balance is $500, the HRA will reimburse her $500. The remaining $200 of prescription costs would then be Sarah's responsibility, unless she has other benefits like a Flexible Spending Account (FSA) or has met her out-of-pocket maximum. If Company ABC's plan allows for rollover of unused funds, any remaining balance at year-end would carry over to the next year, subject to the plan's specific limits.

Practical Applications

Health reimbursement accounts are widely used by employers as a flexible and tax-efficient way to provide healthcare benefits38. Their practical applications span various aspects of financial and benefits planning:

  • Cost Control for Employers: HRAs allow employers to define their maximum financial exposure for healthcare benefits each year, moving away from unpredictable premium increases associated with traditional employer-sponsored health plans37. They only pay out funds when employees incur and submit for eligible expenses, rather than paying fixed monthly premiums for all employees regardless of usage36.
  • Supplementing High-Deductible Plans: Many employers pair HRAs with high-deductible health plans (HDHPs) to make them more attractive to employees. The HRA can cover a portion or all of the deductible, reducing the employee's upfront out-of-pocket costs35.
  • Enhancing Employee Choice: Individual Coverage HRAs (ICHRAs), in particular, allow employers to offer a fixed allowance that employees can use to purchase individual health insurance on the open market or through exchanges34. This provides employees with greater choice and customization over their health coverage than traditional group plans33. Official information on HRAs for employers and individuals can be found from the Centers for Medicare & Medicaid Services.
  • Small Business Solutions: Qualified Small Employer HRAs (QSEHRAs) enable small businesses (fewer than 50 full-time equivalent employees) that do not offer a group health plan to help employees pay for health insurance premiums and other medical expenses on a tax-free basis32. This provides a viable alternative for smaller entities to offer competitive benefits31.
  • Tax Advantages for Both Parties: Employer contributions to an HRA are tax-deductible, and reimbursements to employees for qualified medical expenses are tax-free30. This dual tax benefit makes HRAs an attractive component of a compensation package.

Limitations and Criticisms

While health reimbursement accounts offer numerous benefits, they also come with certain limitations and criticisms that warrant consideration:

  • Employer Ownership and Portability: A significant limitation is that the employer owns the HRA, not the employee. If an employee leaves their job, they typically forfeit any remaining funds in the account, which contrasts with the portability of a Health Savings Account (HSA)28, 29. While some plans may allow limited rollovers, the funds generally revert to the employer upon an employee's termination27.
  • Employer Control Over Expenses: The employer dictates which specific [qualified medical expenses](https://diversification.com/term/qualified medical expenses) are eligible for reimbursement, even if the IRS generally deems them qualified. This means an HRA might not cover all medical costs an employee expects, limiting flexibility from the employee's perspective.
  • Reimbursement-Based Model: Unlike HSAs where funds can be used with a debit card at the point of service, HRAs require employees to pay for expenses upfront and then submit claims for reimbursement26. This can pose a cash flow challenge for employees who may not have immediate funds available to cover large medical bills before being reimbursed.
  • Complexity of Rules: The various types of HRAs (e.g., ICHRA, QSEHRA, Integrated HRA) each come with specific rules regarding eligibility, contribution limits (for QSEHRAs), and integration with other health plans23, 24, 25. Employers must navigate these complexities to ensure compliance. The U.S. Department of Labor provides guidance to help navigate these regulations.
  • No Investment Potential: Unlike HSAs, which can be invested for potential growth, HRA funds are not controlled by the employee and cannot be invested21, 22. This limits their utility as a long-term savings or investment vehicle for healthcare costs in financial planning.

Health Reimbursement Account vs. Health Savings Account

Health reimbursement accounts (HRAs) and Health Savings Accounts (HSAs) are both tax-advantaged tools designed to help individuals cover medical expenses, but they differ significantly in ownership, funding, and portability. An HRA is an employer-funded arrangement, meaning only the employer contributes money to it, and the employer retains ownership of the "account"20. Employees are reimbursed for qualified medical expenses after they incur them, and generally, any unused funds are forfeited if the employee leaves the company19.

Conversely, an HSA is an individual-owned savings account that can be funded by both the employee and the employer17, 18. To be eligible for an HSA, an individual must be enrolled in a high-deductible health plan (HDHP)16. HSA funds are portable, meaning the employee takes the account with them even if they change jobs, and the funds can be invested for potential tax-free growth14, 15. Additionally, HSAs have annual contribution limits set by the IRS, whereas most HRAs (like ICHRAs) do not have a maximum contribution limit, except for QSEHRAs12, 13. Further details on these differences are available in IRS Publication 969.

FAQs

1. Who can contribute to a health reimbursement account?

Only employers can contribute to a health reimbursement account. Employees are not permitted to contribute to an HRA11. This differentiates HRAs from other health benefits accounts like Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs), where employees can also contribute.

2. What expenses can be reimbursed by an HRA?

The specific expenses eligible for reimbursement from a health reimbursement account are defined by the employer's plan design, in accordance with IRS guidelines. Generally, these include a wide range of qualified medical expenses, such as deductibles, copayments, coinsurance, prescription drugs, and sometimes even individual health insurance premiums, depending on the HRA type8, 9, 10.

3. Do HRA funds roll over from year to year?

Whether HRA funds roll over depends on the specific plan design set by the employer. Some employers allow unused HRA funds to carry over from one year to the next, while others may implement a "use it or lose it" rule or a maximum rollover limit6, 7. Employees should check their plan documents for details regarding fund carryover.

4. Is the money in an HRA taxable?

No, the money reimbursed from a health reimbursement account for qualified medical expenses is generally not considered taxable income for the employee5. Additionally, employer contributions to an HRA are typically tax-deductible for the employer4. This provides tax advantages for both parties.

5. What happens to my HRA if I leave my job?

Typically, if you leave your job, any unused funds in your health reimbursement account remain with the employer, as the HRA is owned by the employer2, 3. Unlike a Health Savings Account (HSA), an HRA is generally not portable. Some retiree HRAs are an exception to this rule1.