Health reimbursement arrangement hra

What Is a Health Reimbursement Arrangement (HRA)?

A Health Reimbursement Arrangement (HRA) is an employer-funded plan that reimburses employees for out-of-pocket medical expenses and, in some cases, health insurance premiums. As a core component of employee benefits, HRAs fall under the broader category of health benefits and are designed to provide a tax-advantaged way for employees to manage healthcare costs. Unlike other tax-advantaged accounts such as Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs), the funds in an HRA are owned by the employer, not the employee, and are not considered wages.¹⁸,¹⁷ Employers set up the HRA and contribute funds, and employees submit claims for eligible qualified medical expenses for reimbursement.

History and Origin

The concept of employer-provided healthcare benefits has evolved significantly over time. Health Reimbursement Arrangements gained clearer definition and widespread adoption following regulatory changes in the early 2000s. While employers have long offered various forms of employer-sponsored plans, HRAs emerged as a distinct tool, offering flexibility to both employers and employees in managing healthcare costs. A notable development was the introduction of the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) in 2017 through the 21st Century Cures Act. This specific type of HRA allowed eligible small employers, who do not offer a group health plan, to reimburse employees for individual health insurance premiums and other medical expenses on a pre-tax basis, providing a crucial alternative for smaller businesses to offer health benefits. The Internal Revenue Service (IRS) subsequently issued comprehensive guidance, including extensive FAQs, to clarify the rules for QSEHRAs.¹⁶

Key Takeaways

• Health Reimbursement Arrangements are employer-funded accounts designed to reimburse employees for eligible medical expenses and sometimes health insurance premiums.
• The funds in an HRA are owned by the employer; they are not employee wages and are typically tax-free for the employee when used for qualified expenses.
• HRAs offer employers flexibility in designing benefit plans and managing healthcare expenditures.
• Unlike HSAs, HRAs generally do not allow employee contributions, and the funds may not be portable if an employee leaves their job.
• Specific types of HRAs, like QSEHRAs and ICHRAs, address different employer sizes and benefit structures.

Interpreting the HRA

An HRA is typically interpreted as a benefit designed to mitigate an employee's out-of-pocket healthcare expenditures. For an employee, understanding the specifics of their HRA involves knowing the annual reimbursement limit, which expenses are eligible, and whether unused funds can be rolled over to the next year. Reimbursements from an HRA for qualified medical expenses are generally tax-free to the employee.¹⁵ The IRS provides guidelines in publications like Publication 502 regarding what constitutes a deductible medical expense, which often aligns with what an HRA can reimburse.¹⁴ This helps employees gauge how much of their cost-sharing responsibilities, such as deductibles, copayments, and coinsurance, can be covered by the HRA.

Hypothetical Example

Consider Sarah, an employee at "Innovate Tech," a small company that offers a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). Innovate Tech sets an annual HRA limit of $5,000 for individual coverage. Sarah purchases an individual health insurance premium for $400 per month and incurs $1,200 in out-of-pocket medical expenses, including doctor visits and prescription medications, throughout the year.

1. Premium Reimbursement: Sarah submits her monthly health insurance premium receipts to Innovate Tech. The company reimburses her $400 each month from her HRA.
2. Medical Expense Reimbursement: Sarah then submits receipts for her $1,200 in medical expenses. These expenses are confirmed as eligible qualified medical expenses under the HRA plan.
3. Total Reimbursement: By the end of the year, Sarah has been reimbursed for $4,800 in premiums ($400/month * 12 months) and $1,200 in medical expenses. This totals $6,000.
4. HRA Limit Impact: Since Innovate Tech's QSEHRA limit is $5,000, Sarah can only be reimbursed up to this amount. She receives $5,000 tax-free from her HRA, covering all her premiums and $200 of her medical expenses. The remaining $1,000 in medical expenses is her responsibility beyond the HRA. The employer may choose to allow unused funds to roll over, which would benefit Sarah if her total expenses were less than the limit.¹³ This example illustrates how the HRA directly reduces an employee's personal financial planning burden for healthcare.

Practical Applications

Health Reimbursement Arrangements are widely used by employers as a flexible component of their compensation and benefits strategies. For small businesses, QSEHRAs provide a valuable alternative to traditional group health plans, enabling them to offer tax-free healthcare benefits without the administrative burden or higher costs associated with comprehensive group insurance.¹² For larger organizations, Individual Coverage Health Reimbursement Arrangements (ICHRAs) allow employers to offer varying HRA amounts based on different employee classes, provided the employees purchase individual health insurance coverage that meets the requirements of the Affordable Care Act (ACA). These arrangements enable employers to predict and control their healthcare spending, as they only reimburse employees for actual expenses incurred, up to a defined limit. The U.S. Department of Labor provides extensive guidance on the regulations governing health plans, including HRAs, under the Employee Retirement Income Security Act (ERISA).¹¹

Limitations and Criticisms

While Health Reimbursement Arrangements offer distinct advantages, they also come with limitations and potential criticisms. A primary limitation is that HRA funds are generally employer-owned, meaning an employee typically loses access to the funds if they leave their job.¹⁰,⁹ This contrasts with Health Savings Accounts, where the funds are employee-owned and portable. Furthermore, HRAs are subject to specific IRS rules regarding eligible expenses and contribution limits, which can vary by the type of HRA (e.g., QSEHRA limits are indexed annually by the IRS).⁸

Another point of consideration is that HRAs, by their nature, involve reimbursement. Employees must first pay for their medical expenses and then submit documentation for reimbursement, which can create a temporary cash flow burden. Some critics argue that while HRAs offer tax advantages, the lack of employee control over the funds and the "use-it-or-lose-it" nature of some (though not all) HRA designs can limit their effectiveness compared to more flexible accounts that allow funds to accumulate and be invested, particularly for long-term personal finance and retirement healthcare planning.

Health Reimbursement Arrangement (HRA) vs. Health Savings Account (HSA)

Health Reimbursement Arrangements (HRAs) and Health Savings Account (HSA) are both tax-advantaged accounts designed to help with healthcare costs, but they differ significantly in ownership, funding, and portability. An HRA is solely employer-funded, and the employer owns the account. Employees are reimbursed for qualified medical expenses, but they typically lose access to any unused funds if they leave the company. In contrast, an HSA is an individually owned savings account that can be funded by both the employee and the employer. To be eligible for an HSA, an individual must be enrolled in a High-Deductible Health Plan (HDHP). HSA funds are portable, meaning they stay with the individual even if they change jobs or retire, and can be invested for long-term growth.⁷,⁶,⁵ While HRAs focus on current medical expense reimbursement, HSAs offer a dual benefit of tax-free savings for current expenses and tax-deferred growth for future healthcare needs.

FAQs

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

No, funds in a Health Reimbursement Arrangement can only be used for qualified medical expenses as defined by the IRS. These typically include medical, dental, and vision care, as well as prescription medications. Some HRAs may also cover health insurance premiums.⁴

Do HRA funds roll over each year?

Whether HRA funds roll over depends on the specific plan design chosen by the employer. Some HRAs allow unused balances to carry over to the next plan year, while others may have a "use-it-or-lose-it" policy, similar to some Flexible Spending Accounts.³,² Employees should check their HRA plan details for clarification on rollovers.

Who contributes money to an HRA?

Only the employer contributes money to a Health Reimbursement Arrangement. Employees cannot contribute their own funds to an HRA. This is a key distinction from accounts like Health Savings Accounts, where both employers and employees can contribute, or Flexible Spending Accounts, where employees typically contribute via tax deductions through payroll deductions.¹

Are HRA reimbursements taxable?

Reimbursements from a Health Reimbursement Arrangement for qualified medical expenses are generally tax-free to the employee. This is a significant benefit, as it means employees do not pay federal income tax on the amounts they receive. The employer's contributions to an HRA are also tax-deductible for the business.