What is a Health Reimbursement Arrangement (HRA)
A Health Reimbursement Arrangement is a tax-advantaged benefit that allows both employees and
employers to save on the cost of healthcare.
HRA plans are employer-funded medical reimbursement plans. The employer sets aside a
specific amount of pre-tax dollars for employees to pay for health care expenses on an annual
basis. Based on the plan design, HRAs can generate significant savings in overall health
benefits.
The primary requirements for an HRA are that (1) the plan must be funded solely by the
employer and cannot be funded by salary reduction, and (2) the plan may only provide benefits for
substantiated medical expenses.
HRAs may be designed in many fashions to suit the specific needs of the employer and
employees. It is one of the most flexible types of employee benefit plans making it very
attractive to most employers.
Benefits to the Employer
HRAs are most commonly offered in conjunction with a
High
Deductible Health Plan. As a rule, moving to a high deductible plan will result in
reduced premium costs creating real savings on healthcare costs for the employer. HRA
contributions may then be funded using the savings gained from the lower premium
costs. Funding an HRA allows the employer to bridge the gap between the higher deductible and
when the insurance coverage “kicks in” for their employees.
Most importantly, all employer contributions to the Plan are
100% tax deductible to the employer, and tax-free to the employee.
Employers may establish what expenses the HRA funds may be used for; from as comprehensive as
all health-related eligible expenses to as limited as emergency room expenses only. HRA plans
are very flexible, enabling employers to control their own costs of healthcare while still
providing a valuable employee benefit.
With an HRA, employee healthcare expenditures are visible and clear to both you and your
employees, creating a greater understanding of the costs of healthcare. In addition, by
providing employees more visibility to and control over their healthcare they become smarter
healthcare consumers.
Studies show a usage rate of only 20-50% of healthcare coverage by employees, meaning that
employers often pay health insurance premiums for employees who are not utilizing the
coverage. An HRA allows employers to determine the best type of coverage for their employees
based on the demographics of their employee group.
HRA plans may also cover retired employees (and their spouses and tax
dependents). Employers may wish to consider an HRA as an alternative to more expensive
traditional retiree health care.
Employee benefits, such as an HRA, enable employers to recruit and retain quality
employees. An employer is viewed in a positive light by current and prospective employees
because a benefit package is being provided with the employee’s interest in mind.
Benefits to the Employee
Enrolling in an HRA provides two major advantages to employees, (1) a reduced health insurance
premium resulting from the High Deductible Health Plan, and (2) availability of employer-sponsored
funds that may be accessed to pay for medical expenses incurred prior to the insurance deductible
being met.
Depending on the plan design, expenses that may be reimbursed from the HRA include:
deductibles, co-payments, coinsurance, prescription medications, vision expenses, dental expenses,
and other out-of-pocket health-related expenses.
HRA funds are contributed to employees on a pre-tax basis; therefore the funds are not taxable
to the employee. Due to this, employees need not claim an income tax deduction for an expense
that has been reimbursed under the HRA.
Plan Designs
HRAs are very flexible, allowing the employer to design their plan to meet the unique needs of
the company and the employees. Common plan designs include:
Deductible, Co-pay, and Co-insurance: All medical expenses that are
applicable to the health plan’s deductible, a co-pay amount, or a co-insurance amount qualify for
reimbursement. Qualified expenses are those incurred by the employee or the employee’s
family. An Explanation of Benefits (EOB), showing evidence that the expense is applicable to
the insurance deductible, is typically required for substantiation of request for reimbursement
under this design.
Deductible: Under this design all medical expenses that are applicable to the
deductible of the health plan qualify for reimbursement. This plan design does not include
co-pays or co-insurance amounts. Qualified expenses are those incurred by the employee or the
employee’s family. An EOB is also typically required for substantiation of request for
reimbursement under this design.
All Uninsured Medical Expenses: All out-of-pocket medical expenses
(uninsured costs) are eligible under this plan design. This includes deductibles, co-pays,
coinsurance, dental, vision, prescription, and other out-of-pocket medical expenses. These
expenses can be for the employee and the employee’s family. An EOB, copy of a receipt, or copy
of a bill identifying the date of service, amount of service, and the name of the service provider
are typically used to substantiate requests for reimbursement under this design.
Specific Expenses Only: Plans may be designed to cover dental expenses only,
orthodontia expenses only, vision expenses only, prescription medical expenses only, and/or other
specified expenses. A copy of a receipt or copy of a bill identifying the date of service,
amount of service, and the name of the service provider are typically used to substantiate requests
for reimbursement under this design.
Plan Year (Period of Coverage)
Typically, employers choose to run the HRA concurrent with their health insurance plan year,
but this is not mandatory; the HRA plan year may be run independent of the health insurance plan
year. Short plan years are generally available as well, depending on the options provided by
the plan administrator.
Carryover
With an HRA, unused fund amounts may be carried over from year to year. This differs from
a Flexible Spending Account which maintains the “use-it-or-lose-it” rule.
The employer has full discretion over how the carryover is managed. They may choose to
allow the employee to keep all unused funds for use in later years, keep only a portion of unused
funds, or forfeit all remaining unused funds after the Plan year is complete.
Reimbursement
All requests for reimbursement under an HRA must be substantiated. The most common means
of substantiation is the Explanation of Benefits (EOB) statement provided by the employees’ health
insurance provider after a medical expense has been incurred.
Since the HRA typically pays for out-of-pocket expenses up to the amount of the health
insurance deductible, employees must reference the EOB to see what has been covered by insurance
and what has not for a specific medical expense occurrence. They then request reimbursement
for the portion of the expense that was not paid by their insurance plan.
For other out-of-pocket expenses, a copy of a receipt or bill identifying the date of service,
amount of service, and the name of the service provider is normally required to substantiate
reimbursement.
Discrimination Testing & HIPAA
Standard non-discrimination rules apply to an HRA. Plans must avoid discriminating toward
any employee(s) regarding the parameters of the plan and how funds are allocated, and must ensure
that all employees have similar access to a funded account.
HIPAA privacy rules also apply.
Coordination with a Flexible Spending Account
An employer may choose to offer a Flexible Spending Account Plan (FSA) in conjunction with an
HRA. An FSA is an
employee-funded benefit that allows employees to set aside pre-tax funds to pay for
medical expenses. FSA funds are contributed through salary-reduction, and the amount is
determined by each participating employee.
Combining an FSA with an HRA allows employees to bridge the gap between the employer sponsored
HRA and the health insurance plan.
In a situation where an incurred medical expense could be reimbursed from either the FSA or
HRA, the employer or plan administrator will determine the “ordering rules” which determine which
account the expense shall be reimbursed from first.
COBRA
HRAs are subject to COBRA. Employees experiencing a qualified event must be given the
opportunity for continued participation in the HRA offered by the employer. If an employee
experiences a COBRA qualifying event and makes a COBRA election for the HRA, the employer
determines what to charge the employee a premium in order to continue their participation.
At the beginning of the Plan year, the employer should establish a reasonable premium amount
applicable to the HRA benefit being offered, this decision should take into account the benefit
offered for single vs. family. As the premium is determined at the beginning of the Plan year,
it cannot take into consideration an employee’s account balance at the time of a qualifying
event.