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What Is an HRA: A Deeper Dive Into Employee Health Reimbursement Arrangements

December 4, 2023
What is an HRA?

What is an HRA and how can it be a useful tool within the landscape of employee healthcare benefits? Smart question.

In this article, we'll provide an in-depth exploration of HRAs, their features and advantages, and the breadth of expenses they cover.

This comprehensive guide will walk you through:

  • What is an HRA?
  • Types of HRAs
  • Eligible expenses and reimbursements for HRAs
  • How HRAs work
  • HRA compliance and legal considerations
  • HRA benefits and limitations

Section 1: What is an HRA?

A health reimbursement arrangement (HRA) is an employer-funded plan designed to reimburse employees for qualified medical expenses. In some cases, it can be used to pay for health insurance plan premiums. The key characteristic of an HRA is that it is funded solely by the employer, with no direct contributions from employees.

The purpose of an HRA? It offers employees a way to offset healthcare costs and enhance their overall benefits package.

HRAs are particularly beneficial because they give both employers and employees a tax advantage. Employers can deduct their contributions on their business taxes, while employees receive the reimbursements tax-free.

The flexibility of an HRA also allows employers to control costs. They can set caps on the amount contributed and define what types of medical expenses are eligible for reimbursement. This adaptability makes HRAs a popular choice for businesses seeking to provide healthcare benefits to their employees.

Section 2: Types of HRAs

Flexibility and versatility are nice, especially in personal finance matters. Different types of HRAs serve different purposes and may suit certain circumstances better than others.

Integrated HRA

An integrated HRA, often used in tandem with a high-deductible health plan (HDHP), is designed to help employers offer even more health benefits. This type of HRA reimburses employees for out-of-pocket medical expenses that are not covered by their primary health insurance plan, including deductibles and copayments.

An integrated HRA must be integrated with a qualifying group health plan, and it typically has no maximum contribution limit. It's particularly appealing for larger employers seeking more flexible healthcare options to offer employees.

Qualified small employer HRA (QSEHRA)

This type of plan is specifically tailored for small businesses with fewer than 50 full-time employees. A QSEHRA allows smaller employers to reimburse their employees for medical expenses, including insurance premiums. The appeal of a QSEHRA is its simplicity and its suitability for small businesses that do not offer group health insurance. Contribution limits are set by the IRS and adjusted annually. In 2023, the limits are $5,850 for individual coverage and $11,800 for family coverage.

Individual coverage HRA (ICHRA)

Launched in January 2020, the ICHRA allows employers of any size to reimburse employees for their individual health insurance premiums and other medical expenses tax-free. This HRA is particularly versatile. It can be offered to all employees or specific classes of employees, and there are no caps on employer contributions. This type of HRA is ideal for businesses seeking flexibility in their benefits offerings and for employees who prefer to select their own insurance coverage.

Excepted benefit health reimbursement arrangement (EBHRA)

This is a special type of HRA that allows employers to provide limited additional health benefits independent of other health insurance plans. Characterized by an IRS-set funding cap, EBHRAs don't affect an employee's eligibility for ACA marketplace premium tax credits.

Employers offering an EBHRA must also provide traditional group health insurance. However, employees aren't required to enroll in it. This arrangement stands out for its flexibility. It offers a stand-alone benefit, compliant with federal regulations, yet independent of the primary health plan. The funds in an EBHRA, typically used for premiums for excepted benefits and other qualified medical expenses, do not generally roll over year-to-year and are not portable if an employee leaves the company.

Section 3: Eligible expenses and reimbursements for HRAs

HRAs are helpful in paying for medical, dental and vision expenses, but first you have to know what kinds of qualified expenses typically fall under these plans.

Medical care

The medical care category includes:

  • Doctor and hospital visits.
  • Diagnostic tests and lab work.
  • Prescription medications, medical treatments and surgeries.
  • Physical therapy, mental health counseling, smoking cessation programs and rehabilitation services.
  • Preventive care, including vaccinations and health screenings.
  • Medical supplies and equipment, like crutches or blood sugar test kits.

For a full list of current qualifying medical expenses, see the latest version of the IRS' annual Publication 502.

Dental costs

This category includes:

  • Routine cleanings and dental exams.
  • Fillings, crowns and dentures.
  • Orthodontic treatment, including braces.
  • Oral surgery and extractions.

Vision costs

This category includes:

  • Eye exams and vision tests.
  • Prescription eyeglasses and contact lenses.
  • Laser eye surgery.

Restrictions and exceptions

Restrictions and exceptions that typically apply include:

  • Cosmetic procedures. Generally, cosmetic procedures are not covered unless they are necessary to treat a medical condition.
  • Insurance premiums. While some HRAs, including certain types of ICHRAs, can reimburse health insurance premiums, others cannot.
  • Over-the-counter (OTC) medications. OTC medications can be reimbursed if prescribed by a healthcare provider.
  • Eligibility. Some HRAs may have specific rules about what expenses are eligible, which can vary based on the employer's plan design.

All HRA plans are different, and employers have discretion in defining what expenses their particular HRA will cover. Employees should check their specific HRA plan documents for detailed information on eligible expenses and any exclusions or limitations that apply.

Section 4: How HRAs work

Now that you have a general idea of what HRAs are and what they cover, let's look into how to implement one.

Setting up an HRA for employees and employers

For employers, the first step is choosing the type of HRA that best fits the organization's needs and budget. Once an HRA type is chosen, the employer sets the terms. This includes the amount of funds to be made available to employees, the covered expenses, and any eligibility criteria.

The employer must communicate these details to the employees, typically during an open enrollment period or upon hiring.

Employees are usually required to provide proof of healthcare expenses, which can be submitted for reimbursement from the HRA. This is where the role of HRA administrators becomes crucial. They handle the processing of reimbursement requests, ensure compliance with relevant healthcare laws and regulations, and provide assistance to both employers and employees regarding HRA usage. They also maintain records of all transactions and are responsible for reporting requirements mandated by tax laws and healthcare regulations.

Reimbursement process

To get reimbursed for eligible expenses under a health reimbursement arrangement, employees need to follow these steps:

  1. They must have a qualified medical expense that aligns with the HRA's guidelines.
  2. The employee must obtain and keep detailed documentation. This typically includes an itemized receipt or bill showing the date of service, type of service or item purchased, cost, and the provider's information.
  3. The employee submits a claim for reimbursement. This usually involves completing a claim form provided by the HRA administrator and attaching the necessary documentation. The submission process might require additional information, such as proof of insurance coverage.
  4. The HRA administrator reviews the submission for compliance with IRS regulations and the specific terms of the HRA. If approved, the reimbursement is typically issued to the employee either by direct deposit or a physical check. The time frame for reimbursement can vary, so employees should be aware of their HRA's guidelines. It's also important for employees to keep their documentation for their records and for tax purposes

Who can be reimbursed under an HRA?

According to the IRS, reimbursements under an HRA can be made to the following parties:

  • Current and former employees.
  • Spouses and dependents of those employees.
  • Any person you could have claimed as a dependent on your return (some exceptions apply, check the IRS Publication 969).
  • Your child younger than 27 at the end of your tax year.
  • Spouses and dependents of deceased employees.

Section 5: HRA compliance and legal considerations

IRS regulations surrounding HRAs include guidelines on contribution limits, nondiscrimination rules and compliance. We'll go over those in more detail.

With no set contribution limits for traditional HRAs, employers have flexibility in deciding how much they're going to fund. However, for specific types of HRAs, like qualified small employer HRAs (QSEHRAs), the IRS sets annual contribution limits.

Nondiscrimination rules mandate that HRAs must be offered on the same terms to all eligible employees. This prevents employers from favoring higher-paid employees with better benefits.

Additionally, employers must adhere to strict privacy and security standards for handling personal health information, in line with HIPAA regulations. Other compliance requirements include:

  • The need for employers to provide written notice to employees about the HRA.
  • For HRA plans to be substantiated and documented appropriately to satisfy IRS regulations.
  • This establishes that HRAs are used fairly and effectively, aligning with both tax laws and healthcare regulations.

Note that unlike health savings accounts, there are no reporting requirements for HRAs on income tax returns.

State and local laws

HRA regulations can vary according to state and local laws. Unfortunately, this can complicate their implementation and administration. These variations often involve specific insurance regulations, healthcare mandates and tax treatments of HRAs.

For example, some states may have specific rules about what constitutes eligible medical expenses. Or they may impose additional consumer protection regulations that impact HRA administration. Employers and employees need to be aware of these nuances for compliance.

To navigate these complexities, consult state insurance department websites, local government health departments, and legal advisors specializing in health insurance and employee benefits. National resources like the U.S. Department of Labor's website and the IRS' publications on HRAs can also provide guidance on federal regulations. Cross-reference those with state-specific information.

Section 6: HRA advantages and limitations

HRAs have plenty of benefits for both employers and employees, mostly revolving around tax advantages and flexibility.

For employers, HRAs offer a tax-efficient means to contribute toward their employees' healthcare expenses, as these contributions are tax-deductible and exempt from payroll taxes. This not only provides a fiscal benefit but also enhances the attractiveness of their benefits package, aiding in employee retention and recruitment.

Employees, in turn, enjoy the benefit of receiving reimbursements for a wide range of medical expenses on a tax-free basis. Their ability to tailor healthcare spending according to their specific needs may lead to greater satisfaction with their benefits package. And employees who like their benefits are much more likely to be happy, productive and longevous.

Keep in mind, however, that if an employee is covered by an HRA, they may be ineligible for premium tax credits, or the amount of the credit may be reduced. This typically depends on whether the HRA provides affordable and adequate coverage as defined by the Affordable Care Act (ACA).

HRAs can be designed to complement existing health insurance plans, providing additional coverage and financial support for out-of-pocket medical costs. This combination of tax benefits, customizable healthcare spending and the ability to complement existing health plans makes HRAs a valuable and versatile tool among employee benefits.

Unlike with flexible spending accounts' "use-it-or-lose-it" policy, any unused funds in the HRA can be carried forward for reimbursements in later years. An employer isn’t permitted to refund any part of the balance to the employee.

Limitations

Health reimbursement arrangements come with certain limitations and restrictions that both employers and employees should know.

One key limitation is the strict adherence to IRS rules regarding eligible expenses, which may be restrictive.

Additionally, the benefits of an HRA are typically tied to employment. If an employee leaves the company, they usually lose access to the HRA funds. For employers, the challenge lies in ensuring compliance with both federal and state regulations, which can be complex. To navigate these challenges, it's crucial for employers to clearly communicate the specifics of their HRA plan to employees, including what expenses are covered and the process for reimbursement.

They should also stay informed about regulatory changes by consulting legal or HR professionals and resources from the IRS and Department of Labor. For employees, understanding the details of their HRA, keeping thorough documentation of medical expenses, and staying informed about their rights and responsibilities are key to maximizing the benefits of an HRA while heeding its limitations.

Using an HRA to your advantage

Navigating the complexities of HRAs can be a daunting task for any business. But you don't have to tackle these challenges alone. TriNet's vast expertise and comprehensive HR management solutions can simplify HRA administration, ensuring compliance and optimizing your employees' benefits.

Reach out to a TriNet representative today to find out how personalized HR services and benefits administration can transform the way your business implements and manages HRAs.

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