What is a Health Reimbursement Arrangement (HRA)?
Employers finance a health reimbursement arrangement (HRA) to compensate employees for eligible medical expenditures and insurance premiums. These programs allow employers to deduct reimbursements, and employees receive tax-free reimbursements.
How HRAs Work
Employers set up health reimbursement arrangements to cover employee medical expenditures. The employer sets the plan’s contribution, and employees can request reimbursement for medical expenditures up to that amount. HRA contributions must be the same for all class employees.
HRAs are not accounts. Employees cannot take cash in advance and utilize it for medical bills. They must pay first and then be reimbursed. Employers can reimburse with an HRA debit card at the moment of service.
Employees who exhaust HRA funds before year-end must pay for subsequent health bills out-of-pocket or with funds from a flexible spending account (FSA) or health savings account (HSA) for high-deductible health plan employees.
Health reimbursement arrangements do not cover maternity clothing, gym memberships, or daycare.
Types of HRA
There are several health reimbursement options.
The QSEHRA is a small employer health reimbursement program.
A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) provides health care subsidies for organizations with fewer than 50 full-time employees. Known as a small company HRA, a QSEHRA can balance health insurance coverage or reimburse unpaid medical expenditures.
The IRS determines annual restrictions. A corporation with a QSEHRA can compensate individual employees for $5,450 and families for $11,050 in 2022. The limitations rise to $5,850 per person and $11,800 per family in 2023.
The refunded funds are tax-free for employees and tax-deductible for companies.
ICHRA Individual Coverage
In January 2020, an Individual Coverage HRA (ICHRA) becomes available. HRAs could not previously pay individual health insurance premiums. The government permits companies to give individual coverage HRAs instead of group health insurance starting in January 2020.9
HRAs allow employees to purchase comprehensive health insurance using pretax cash on or outside the Affordable Care Act’s marketplace. Individual coverage HRAs can repay eligible health expenditures like copayments and deductibles.
Suppose your employer’s ICHRA fulfills basic “affordability” requirements, and you opt in or out of the coverage. In that case, you may qualify for a premium tax credit to help pay for health insurance under the Affordable Care Act.
Excepted Benefit HRAs
Employers with typical group health insurance can also provide Excepted Benefit HRAs (EBHRAs) to reimburse employees for up to $1,950 in eligible medical expenditures.
Even without corporate health insurance, employees can participate in an “excepted benefit HRA” but cannot use the money to buy complete health insurance. They can utilize the cash for short-term health insurance, dental and vision premiums, and eligible medical costs.
Health reimbursement benefits
HRAs can pay for qualified medical expenses like prescription drugs, insulin, an annual physical exam, crutches, birth control pills, hospital meals, psychologist or psychiatrist care, substance abuse treatment, transportation costs, and more.
Employees can utilize HRAs to obtain complete health insurance using pretax cash through the individual coverage HRA.
Employees can cover spouses’ and dependents’ medical, dental, and vision costs with HRA funds.
Health reimbursement restrictions
An HRA covers only eligible medical and dental costs. According to the IRS, health-related spending, such as vitamins, are not medical expenses.
Despite IRS-qualified medical costs, an employer may exclude them. Employee HRA plans list reimbursable medical expenditures.
The IRS informed taxpayers that flexible health spending arrangements, health savings accounts, and health reimbursement arrangements could cover at-home COVID-19 tests and personal protective equipment like face masks and hand sanitizer.
Pros
- It can cover medical and dental expenditures, including prescriptions, yearly physicals, and birth control pills.
- I can buy individual health insurance using pretax cash.
- Reimburses employees for medical and insurance costs.
Cons
- Doesn’t cover unnecessary expenses like teeth whitening, funerals, or non-prescription drugs.
- The employer sets up the plan and determines its funding.
- You cannot take cash before paying expenditures; you must pay first and wait for reimbursement.
Other arrangements vs. health reimbursement
Employees with an FSA, an HRA, and a cost qualifying for both plans can’t pick which plan pays for it. Instead, the employer’s first-pay plan will cover the expenditures. After this first plan runs out, the second plan will pay eligible medical expenditures submitted for reimbursement.
We examine two more ways to pay for medical bills.
FSA
A part of an employee’s pretax pay funds an FSA. Unlike an HRA, each employee decides how much to put into these arrangements—up to $2,850 in 2022 and $3,050 in 2023.
Employers can roll over HRA money to the following year. Employers may allow up to $610 to be carried over for unused FSA funds, but they typically cannot be utilized in the next plan year.
HSA
Health savings accounts (HSAs) are fully vested, tax-advantaged accounts that do not lose funds if they remain in the account at the end of the year, unlike HRAs. An HSA and HDHP cover medical and dental costs. The employee or employer finances the account, which cannot pay insurance premiums like an FSA. Employees can maintain HSAs after switching employment, unlike HRAs and FSAs.
How do I use HRA funds?
Your employer decides which medical expenditures an HRA can cover. Some policies reimburse solely for health plan services, while others cover dental, vision, and pharmacy.
HRAs sometimes cover copays, hospital bills, medical equipment, eyeglasses, and routine doctor visits.
The IRS also disqualifies additional costs. Teeth whitening, maternity clothing, burial services, health club memberships, prohibited narcotics, daycare for a healthy infant, foreign medicine, and non-prescription pharmaceuticals are not required medical costs.
Non-Portable HRAs
HRA Funding and Portability
The company funds the health reimbursement agreement and sets each employee’s maximum HRA contribution. As said, employers decide how much to contribute to HRAs, but all workers in the same class must get the same amount. Older or dependent workers may earn more.
An employer may set a maximum rollover limit for HRA money unspent by year-end. A fired or departing employee does not take the HRA with them. It’s not portable like an HSA.
HRA Tax Benefits
Employers benefit from 100% tax-deductible HRA reimbursements. A company may utilize an HRA to pay the health expenditures of numerous employee classes instead of more expensive regular healthcare. Employers may also foresee their annual HRA health benefit costs since they fund the programs entirely.
Employees can use it to pay for many medical expenses not covered by their health insurance. Depending on the kind, they may utilize HRAs for medical, dental, and vision insurance premiums.
Up to a certain sum every coverage period, reimbursements are tax-free. Companies may provide HRAs with other health benefits, like FSAs.
Frequently asked questions
What is a health insurance HRA?
Employers fund employee medical expenditures using HRAs.
How do HRAs work?
The company sets the plan’s funding, and employees can request reimbursement for approved medical costs up to it. These schemes provide tax-free payments to employees and allow employers to deduct them.
What is the difference between HRA and HSA?
A health reimbursement arrangement (HRA) reimburses employees for approved medical costs and health coverage premiums tax-free.
High-deductible health plan (HDHP) members utilize HSAs to save for eligible medical costs.
Get my HRA cashout.
No HRA. Employees can roll over unused funds up to a certain amount for the following year.
HRA reimbursement: what qualifies?
Medical and dental costs include annual checkups, medicines, and drug addiction treatment.
Bottom Line
Employers can utilize a tax-advantaged health reimbursement arrangement (HRA) to compensate employees for authorized medical and dental expenditures. Within a yearly limit, the employer sets the plan amount and reimburses employees up to that amount. The employee reimbursements are tax-free, and employers can deduct them from their taxes.
Small enterprises with fewer than 50 full-time employees can get a QSEHRA. Employees can buy health insurance with pretax cash through an Individual Coverage HRA (ICHRA). ICHRA employees can get health copayments and deductibles refunded.
Conclusion
- Employee HRAs cover medical and insurance costs.
- Employers finance HRAs, not workers.
- An HRA is not transferable; employees lose it when they leave.
- Government guidelines, which companies can tweak, determine employee expenditure reimbursement.
- Funds can pay health, vision, and dental insurance premiums and eligible medical costs, depending on the HRA.
