How Does an HRA Work?
If you’re like most people, you’re probably more familiar with a Health Savings Account (HSA) or a Flexible Spending Account (FSA) than a Health Reimbursement Arrangement (HRA). While the former share some similarities, the latter is very different. In fact, unlike an HSA or FSA, an HRA is not an account at all – hence the name!
What is an HRA?
A Health Reimbursement Arrangement (HRA) is an employer-funded plan that reimburses employees for qualified medical expenses. Depending on the type of HRA, funds may be used to reimburse premiums, deductibles, and copays for health, vision, and dental insurance. Employers may claim a tax deduction for the reimbursements they make through an HRA, and reimbursements received by the employee are generally tax-free.
How does it work?
The employer decides how much to put into the plan, and employees can be reimbursed for medical expenses incurred up to that limit. Employees cannot withdraw funds in advance -- they must incur the expense first, then have it reimbursed. Employees can be reimbursed at the time of service if the employer provides an HRA debit card. Expenses may be reimbursed in a different plan year than the one in which they are incurred.
An HRA can be used for medical expenses such as prescription medications, insulin, an annual physical exam, crutches, birth control pills, care from a psychologist or psychiatrist, substance abuse treatment -- even transportation costs incurred to get medical care. It also can cover the cost of COBRA. Employees can use the money to cover medical, dental, and vision costs for their spouse and dependents.
An HRA may not be used for expenses to maintain general health, such as vitamins. Some expenses that do not qualify: teeth whitening, maternity clothes, funeral services, health club membership fees, controlled substances, childcare for a healthy baby, marriage counseling, and non-prescription medications.
Be aware that an employer is permitted to exclude certain medical expenses even though the expenses are qualified by the IRS. An employer’s list of reimbursable medical expenses are outlined in its HRA plan document provided to participating employees.
The money must be used by the end of the plan year, although some employers allow amounts to carry over with a grace period into the next year. If there is no grace period, you’ll need to submit your expenses for reimbursement before the end of the plan year. The grace period is set by the employer.
- Funds an HRA and sets contribution limit
- Decides what the HRA can pay for
- Decides whether unused funds carry over to the next year
- Do not pay taxes on money that comes from an HRA
- May not take an HRA with them if they leave a job
- Can use this money on qualified medical expenses chosen by the employer
Types of HRAs
There are a few variations of the HRA. Here is a brief overview of how they are used.
- A Qualified Small Employer HRA (QSEHRA -- “Q-Sarah”) is available for businesses that employ fewer than 50 full-time workers. Also known as a “small business HRA,” a QSEHRA can be used to offset health insurance coverage or repay medical expenses that would be otherwise uncovered. The money that is reimbursed is tax-free for employees and tax-deductible for employers. The yearly limits are set by the IRS.
- An Individual Coverage HRA (ICHRA -- “ick-rah”) is offered by an employer in lieu of group health insurance. Employees can use an ICHRA to buy their own comprehensive individual health insurance with pretax dollars either on or off the Affordable Care Act’s Health Insurance Marketplace. An ICHRA can also reimburse employees for qualified health expenses, such as copayments and deductibles.
- An Excepted Benefit HRA (EBHRA -- “e-brah”) can be used by employers offering traditional group health insurance to reimburse employees for qualified medical expenses. Employees can enroll in an EBHRA even if they decline group health insurance coverage, but they cannot use the money to buy comprehensive health insurance. They can, however, use the money to pay for short-term health insurance, dental and vision insurance premiums, and qualified medical expenses.
Note: QSEHRAs and ICHRAs can stand on their own, providing two different ways of helping employees obtain their own health coverage. However, EBHRAs must be offered in conjunction with a group health insurance plan.
There’s certainly a lot to know here. We’d be happy to walk you through the many nuances of an HRA.