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Health Reimbursement Arrangement (HRA)

 

Health Reimbursement Arrangement
The HRA has been referred to by a variety of different names in the past such as personal savings accounts, personal care accounts, defined contribution plans, or consumer-driven health care plans.

The clarification came in 2002, when the IRS finally issued guidelines in Notice 2002-45 and Revenue Ruling 2002-41 for employer-provided medical reimbursement accounts and called it the Health Reimbursement Arrangement (HRA).  See IRS Bulletin 2002-28 for further information.

HRA accounts can pay similar expenses as a Section 125 Medical Reimbursement Flexible Spending Account (FSA).  A key difference is that unlike an FSA, only employers can contribute to the HRA.

How Employers Utilize the Health Reimbursement Arrangement (HRA)
Un-reimbursed health insurance expenses are one way employer groups are utilizing the HRA. With an HRA, the employer will fund an account from which the employee is reimbursed for qualified medical expenses, such as prescriptions, deductibles, vision care, co-pays, long-term care, medical insurance, chiropractic care, and most dental expenses.  Medically necessary over-the-counter (OTC) drugs may also be reimbursed through an HRA.  HRA reimbursements are not taxed to the employee, and are deductible by the employer.

The most common use of an HRA is in combination with a High Deductible Health Coverage (HDHC) Plan. The HRA can enhance a company's benefit package while helping to contain costs and boost employee morale.  As an example, you can combine your HRA with a higher-deductible health insurance plan.  The employer can benefit from reduced insurance costs, but the effect to the employee is cushioned with an HRA.

HRA Plan Design Flexibility
The HRA provides employers with flexibility in Plan design.  Limits can be set on types of services reimbursed by an HRA.  Amounts contributed to an HRA can be in a lump sum or incrementally throughout the year.  This is in contrast to a Section 125 Medical FSA in which the employer can be liable for the full amount on the first day of the plan.  The employer can also choose to carry over unused HRA funds to the next plan year, or have all or a portion of the unused HRA funds forfeited at the end of the year.

In contrast to the "use-it-or-lose-it" rule of FSA plans, the employee may get to carry forward any unused HRA account funds. Depending on the HRA design options elected by the employer, their employees may request reimbursement for medical expenses at the time services are rendered, accumulate them for reimbursement in the future, or save the funds in the HRA for retiree health benefits.

Who Can Establish an HRA Plan
Sole Proprietors, partnerships, regular corporations, S corporations, limited liability companies (LLCs), professional corporations, and 501(c)3 not-for-profits can establish an HRA plan.

Individuals that can not personally participate in an HRA include sole proprietors, partners, members of an LLC (in most cases), or individuals owning more than 2% of an S corporation. Although the above mentioned specific owners can not personally participate they can still sponsor an HRA and benefit from the write-off.

 

HRA Advantages to Employers and Employees

Control – The HRA allows an employer to retain control of funds and decide what type of expenses will be reimbursed, and also whether the HRA funds will carry over from year to year. By adding a HDHC plan with your HRA plan you can reduce the cost of providing healthcare benefits to your employees.

Financial Flexibility – The HRA doesn't require pre-funding; you can simply reimburse enrolled members for eligible expenses as they occur. This can free up your organization's assets for other uses.

Savings - HRA reimbursements are tax deductible for employers and tax exempt for employees.  That means everyone can realize a tax advantage when HRA is selected.  Employers and employees can also enjoy lower premiums that go with HDHC.

Choice - There are no restrictions on the type of health plan that can be paired with an HRA, therefore you are free to choose the best plan for your employees.  Also, employees make the decision of where and when to spend HRA funds.  They are free to choose healthcare providers and shop for improved prices.

Important HRA Facts

HRA Carryover Provisions – The HRA with a carryover feature can be offered on a tax-favored basis if the following conditions are satisfied:

  • The HRA must be funded with employer contributions only;
  • If HDHC is coupled with the HRA, the employee portion of the premium can be paid with pre-tax-salary deductions, however, in no event can the HRA itself be funded with pre-tax salary deductions or through a cafeteria plan;
  • An HRA reimburses only substantiated medical care expenses incurred by employees and their spouses and dependents; and
  • Unused portions cannot be cashed out.  Terminated employees can spend down their HRA balances after they terminate.

The HRA is an Health FSA with some differences - Many health FSA rules do not apply to the HRA: (1) An HRA, unlike an FSA, can reimburse insurance premiums. (2) The HRA coverage period is not required to be 14 months, like an FSA. (3) The FSA rule limiting reimbursement to expenses incurred during the current period of coverage does not apply. This means expenses incurred during the current plan year can be reimbursed in the subsequent year so long as the individual was a participant at time the expense was incurred.

The HRA Can Be Designed To Pay Last, After The Health FSA - Normally the health FSA must be the payer of last resort. Thus if an employee participates in both the HRA and a health FSA and they both cover the same expenses, the employee would first look to the HRA for payment increasing the likelihood the employee might have to forfeit unused health FSA funds. The good news is the IRS has authorized employers to design HRAs to require the health FSA to pay first, which will reduce health FSA forfeitures under the use-it-or-lose-it rule.

COBRA and HRAs – The HRA is generally subject to COBRA continuation coverage requirements unless the small employer exemption applies.

Nondiscrimination Rules and HRA – The HRA can not discriminate in favor of highly compensated employees.

Prohibition on mid-year changes does not apply - The 12-month period of coverage and prohibition of mid year changes does not apply to an HRA.

Are Account Earnings Taxable - This is not applicable if reimbursements are made directly out of the general assets of the employer. If the HRA is funded by a Voluntary Employee Beneficiary Association (VEBA) trust account, earnings are generally not taxable.

Form 5500 Reporting Requirement - Employer groups covering more than 100 participants must file an IRS Form 5500 within seven months of the plan year end.

Plan Document Required - The Code requires that a plan be in writing and that each participant receives a Summary Plan Description, (SPD).

 

Select this link to see a comparison between the HSA, HRA and FSA: HSA, HRA and FSA Comparison

 

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