A Health Reimbursement Arrangement (HRA) is an IRS approved tax-favored benefit, exclusively funded by the employer, which reimburses employees for qualified medical care expenses not reimbursed under other plans. A written plan document is required which describes all benefits and establishes rules for eligibility and elections. Participants may be reimbursed for qualified expenses via direct deposit, payment card or check.
Why Employers Like HRAs:
HRAs provide employers with the greatest flexibility in plan design and can be a great tool in managing the cost of healthcare.
- Employers may establish HRAs for active employees as well as create accounts that are funded annually and may be used to pay medical expenses after termination of employment.
- HRAs on not bound by the uniform coverage rule which says the entire amount of the contribution must be available on day one of the plan year. In fact employer contributions may accrue once a year, on an as-needed basis (as claims are submitted), or on a predetermined, pro rata basis throughout the plan year (e.g., each month or each pay period). Employees may submit their expenses for reimbursement any time but reimbursement will occur as funds are made available (similar to a dependent care FSA).
- In addition to determining the frequency, Employers determine the amount of the contribution to the HRA. Unused sick or vacation leave may be contributed to an HRA on an automatic and non-elective basis
- Employers determine what medical expenses may be reimbursed and may be as broad as the regulations allow or more narrow to meet the objectives of plan design
- The Employer , not the IRS, determines the maximum amount of funds contributed to the HRA and carried forward to the next plan year.
- With an HRA and corresponding HDHP employees become more aware of the real cost of medical care, which may help reduce future medical trend and claims experience and lower medical premiumsThe HRA with its carryover provision for “tomorrow’s” use may provide a financial incentive to encourage employees to adopt healthy lifestyles “today”.
Why Employees Like HRAs:
Employees have many incentives for participating in an HRA:
- HRAs are fully funded by the Employer and are tax free contributions to the employee.
- Funds left in an HRA at the end of a plan year may be carried forward and used for medical expenses in subsequent plan years, including into retirement .
- The HRA may be used to pay expenses incurred by the participant, his/her spouse, children under age 27, or eligible tax dependents
- Unlike medical expense FSAs, an HRA may be used to pay for medical premiums on a tax-free basis; this is important when premiums are associated with insurance products not included in a cafeteria plan (i.e long term care).HRAs may be used in conjunction with medical expense FSAs and Health Savings Accounts (HSAs), thereby increasing contributions to these accounts and the corresponding tax savings.
Types of HRAs:
There are several different types of HRAs that an Employer may choose to offer its Employees. To comply with recent healthcare reform legislation that prohibits annual limits, HRAs must be integrated with other more comprehensive group coverage, be set up as a Retiree only HRA, or be limited to certain excepted benefits.
HRAs may be integrated with group health plans and more often than not an HRA is paired with a High Deductible Health Plan (HDHP). The underlying plan must meet all of health care reforms’ requirements.
- Retiree HRA – Retiree HRA funds become available to Employees once they retire or terminate employment. Employers generally create a vesting schedule and eligibility requirements that must be met before an Employee is able to participate and enjoy the benefits upon retirement. . Like any vesting schedule, it promotes employee retention by establishing a benefit for tenured employees.
- Limited Purpose HRA – Limited Purpose HRAs may be useful when an employer also offers Health Savings Accounts or medical expense FSAs. Limiting what may be reimbursed through one account helps to facilitate eligibility for other accounts, for example plans may limit HRA reimbursement to preventive services, limited-scope dental and vision benefits, and premiums to help employees with eligibility for an HSA as well. Other excepted benefits include accident and liability insurance coverage, specified disease or illness coverage, and hospital indemnity insurance. HRAs may also be limited to certain co-pay or deductible amounts.
- Post-deductible – The Post-deductible HRA is tied to an HDHP, however, it does not begin reimbursing eligible expenses until the Employee meets the HDHP’s deductible first. This type of HRA has been gaining popularity recently with Employers because there are no HRA expenses to be reimbursed until the Employee meets their deductible.
- Suspended – Suspended HRAs are another option for Employers offering HSAs but do not cover any expenses as long as the Employee remains covered by another plan (such as an HSA). The benefit of this HRA is that it offers coverage after retirement to reimburse all eligible expenses – including premiums!
- Funded – A Funded HRA is similar to a Suspended HRA in that the funds cannot be accessed until after retirement. However, a Funded HRA pools the Employees account balances into a Trust account. The Trust is then able to invest that entire pool so that the funds gain interest, which is then added to the sum balance.