Health reimbursement arrangement

What Is a Health Reimbursement Arrangement?

A Health Reimbursement Arrangement (HRA) is an employer-funded plan that reimburses employees for out-of-pocket medical expenses and, in some cases, individual health insurance premiums. As a component of health benefits, HRAs fall under the broader category of tax-advantaged accounts, allowing employers to contribute funds on a tax-free basis, and reimbursements for qualified medical expenses are generally tax-free to the employee. Unlike other health accounts, only employers can contribute to a Health Reimbursement Arrangement; employees cannot make contributions. Funds in a Health Reimbursement Arrangement can often be rolled over from year to year, providing a long-term benefit for healthcare costs.

History and Origin

The concept of employer-sponsored healthcare dates back to the mid-20th century, with the rise of employer-sponsored health plans becoming more common after World War II. However, Health Reimbursement Arrangements as they are known today were not explicitly established by statute but rather first acknowledged by the Internal Revenue Service (IRS) in guidance issued in 2002.¹⁶,¹⁵ Specifically, IRS Notice 2002-45 and Revenue Ruling 2002-41 outlined key rules for HRAs, clarifying the conditions under which employers could provide these arrangements on a tax-free basis.¹⁴,¹³

In the years following, legislative and regulatory changes further shaped HRAs. The 21st Century Cures Act of 2016 introduced the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), which permitted certain small employers to reimburse employees tax-free for individual health insurance premiums and other medical costs.¹²,¹¹ Building on this, in June 2019, the Departments of Treasury, Labor, and Health and Human Services issued final rules that significantly expanded the use of HRAs. These rules introduced the Individual Coverage Health Reimbursement Arrangement (ICHRA), allowing employers of all sizes to offer HRAs integrated with individual health insurance coverage or Medicare.¹⁰,⁹ This expansion aimed to provide greater flexibility and choice for both employers and employees in managing healthcare costs.

Key Takeaways

• A Health Reimbursement Arrangement (HRA) is an employer-funded account for medical expenses.
• Contributions made by employers to an HRA are tax-deductible for the employer, and reimbursements are generally tax-free for the employee.
• HRAs can cover a wide range of qualified medical expenses, including deductibles, coinsurance, and copayments, and in some cases, health insurance premiums.
• Unlike Flexible Spending Accounts (FSAs), only employers can contribute to an HRA, and unused funds often roll over to subsequent years.
• Various types of HRAs exist, such as Group Health Plan HRAs, Qualified Small Employer HRAs (QSEHRAs), Individual Coverage HRAs (ICHRAs), and Excepted Benefit HRAs, each with specific rules.

Interpreting the Health Reimbursement Arrangement

A Health Reimbursement Arrangement is a flexible financial tool that allows employers to assist employees with healthcare costs outside of traditional group health plans. For employees, the significance of an HRA lies in its ability to provide tax-free funds for out-of-pocket expenses, potentially reducing the financial burden associated with healthcare. The maximum dollar amount available for reimbursement is set by the employer for a specific coverage period. Unused portions of this amount often carry forward, accumulating over time and providing a growing pool of funds for future medical needs, even potentially into retirement if permitted by the plan.⁸,⁷

The type of HRA offered, such as a Group Coverage HRA (GCHRA) or an Individual Coverage HRA (ICHRA), dictates how it can be used. A GCHRA is typically integrated with a high-deductible health plan (HDHP), helping employees cover expenses before their deductible is met. An ICHRA, on the other hand, allows employers to reimburse employees for individual health insurance premiums purchased on the open market, offering more choice in coverage.

Hypothetical Example

Consider Sarah, an employee at Tech Innovations Inc. Her employer offers a Health Reimbursement Arrangement with an annual reimbursement limit of $2,000. Sarah enrolls in an individual health insurance plan that costs her $400 per month in premium and has a $1,500 deductible.

In January, Sarah pays her $400 premium. She submits this receipt to Tech Innovations Inc., and $400 is reimbursed to her from her HRA balance.
In March, Sarah has an unexpected medical procedure, incurring a $1,000 bill, which goes towards her health plan's deductible. She pays this out-of-pocket and then submits the receipt for reimbursement from her HRA. The $1,000 is reimbursed.
By April, Sarah has used $400 (premium) + $1,000 (medical bill) = $1,400 from her HRA. She still has $600 remaining ($2,000 - $1,400). If her plan allows for rollovers, any unused balance at the end of the year would carry over, increasing her available funds for the next year.

Practical Applications

Health Reimbursement Arrangements are widely used by employers as a flexible component of their compensation and benefits strategies. They are particularly relevant in the current landscape of rising healthcare costs, enabling employers to define their contribution while providing employees with tax-preferred funds for medical expenses.⁶

One significant application is the pairing of HRAs with high-deductible health plans. This combination can make HDHPs more attractive to employees by offsetting the higher out-of-pocket costs, such as deductibles, associated with these plans. Employers benefit from potentially lower premium costs for HDHPs, while employees gain financial assistance for their medical needs.⁵

Furthermore, Individual Coverage HRAs (ICHRAs) have allowed employers to move away from traditional group health plans in some instances, instead providing employees with funds to purchase coverage on the individual market. This approach can offer employees more choice in selecting a health plan that best fits their needs.⁴ Employers can also use Excepted Benefit HRAs to cover specific limited benefits like dental or vision, alongside a traditional group health plan, providing additional financial support for these services. The U.S. Department of Labor (DOL) provides guidance on the regulations surrounding various types of HRAs to ensure compliance.³

Limitations and Criticisms

While Health Reimbursement Arrangements offer notable benefits, they also have limitations and have faced criticisms. A primary limitation is that HRAs are solely employer-funded; employees cannot contribute their own pre-tax dollars to these accounts. This differs from other popular health savings vehicles like Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs), where employee contributions are often permitted.²

Another point of contention has been the interaction of HRAs with subsidies available under the Affordable Care Act (ACA). For instance, an offer of an Individual Coverage HRA by an employer, if deemed affordable, can disqualify an employee from receiving premium tax credits or cost-sharing reductions in the ACA marketplace. This can create a dilemma for some lower-wage employees, who might find greater financial benefit from marketplace subsidies than from an employer's HRA contribution.¹

Additionally, HRAs are subject to complex rules and regulations, including those under the Employee Retirement Income Security Act (ERISA) and IRS guidelines. Employers must ensure their HRA plans comply with these requirements, which can be challenging to administer, particularly for smaller businesses without dedicated human resources or benefits departments. Mismanagement or non-compliance can lead to penalties and tax implications.

Health Reimbursement Arrangement vs. Health Savings Account

Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs) are both tax-advantaged tools for healthcare expenses, but they differ significantly in their structure and rules.

The primary confusion between the two often arises from their similar purpose of helping cover healthcare costs with tax deductions. However, the key distinction lies in ownership and funding. HSAs are individual accounts that employees own and can take with them if they change jobs, whereas HRAs are employer-owned and typically cease upon termination of employment, unless specific retiree provisions are in place.

FAQs

Can an HRA reimburse health insurance premiums?

Yes, certain types of Health Reimbursement Arrangements, such as Individual Coverage HRAs (ICHRAs) and Qualified Small Employer HRAs (QSEHRAs), are designed to reimburse employees for individual health insurance premiums. Other HRAs, like Group Coverage HRAs, typically only reimburse out-of-pocket medical expenses not covered by a group plan.

Do HRA funds expire or roll over?

The ability of Health Reimbursement Arrangement funds to roll over depends on the specific plan design established by the employer. Many HRAs allow unused balances to carry forward from one year to the next, which can be a significant benefit, as it allows funds to accumulate for future healthcare needs. However, some plans may impose limits on rollovers or have a "use-it-or-lose-it" rule for certain portions of the funds.

Are HRA reimbursements taxable income?

No, reimbursements from a Health Reimbursement Arrangement for qualified medical expenses are generally not considered taxable income to the employee. This is a key advantage of HRAs, as both employer contributions to the HRA and subsequent reimbursements for eligible expenses are typically tax-free. The IRS Publication 969 provides comprehensive guidance on the tax treatment of these accounts.