A Health Reimbursement Arrangement (HRA) 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 provide benefits for substantiated medical expenses only.
HRAs may be designed in many fashions to suit the specific needs of employer and employees alike. It is one of the most flexible types of employee benefits 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 Health Plan will result in reduced premium costs, which creates real savings on healthcare costs for the employer. HRA contributions may then be funded using the savings gained from the lower premium costs. By funding an HRA, the employer effectively bridges the gap between the higher deductible and the expenditure amount at which 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. Because they are very flexible, HRA plans enable employers to control costs of providing healthcare benefits while providing a valuable employee benefit.
With an HRA, employee healthcare expenditures are visible and clear to employer and employee alike, thereby fostering a greater understanding of the costs of healthcare. In addition, employees who can monitor and control their healthcare costs become smarter healthcare consumers.
Studies show that only 20-50% of employees actually use their healthcare coverage, meaning 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 healthcare.
Employee benefits, like an HRA, enable employers to recruit and retain quality employees. With an HRA in place, the employer is perceived in a positive light by current and prospective employees because a benefits 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 to pay for medical expenses incurred prior to point at which the insurance deductible is met.
Depending on the plan design, expenses that may be reimbursed from the HRA include the following: deductibles, co-payments, co-insurance, 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. As such, employees need not claim an income tax deduction for an expense that has been reimbursed under the HRA.
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 the following:
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) statement (provided by the employee's health insurance provider) showing evidence that the expense is applicable to the insurance deductible, is typically required for substantiation of requests for reimbursement.
Deductible: All medical expenses that are applicable to the health plan's deductible 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 statement is also typically required for substantiation of requests for reimbursement.
All Uninsured Medical Expenses: All out-of-pocket medical expenses (uninsured costs) are eligible. This includes deductibles, co-pays, coinsurance, dental, vision, prescription, and other out-of-pocket medical expenses. These expenses may be incurred by the employee or the employee's family. An EOB statement, 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.
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.
Plan Year (Period of Coverage)
Typically, employers choose to run the HRA concurrent with their health insurance plan year; this co-cycle is not mandatory and the HRA plan year may be independent of the health insurance plan year. Short plan years are generally available as well, depending on the options provided by the plan administrator.
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.
Employers have full discretion over how the carryover is managed. They may choose to allow the employee to keep all or only a portion of unused funds for use in later years, or may require forfeiture of all fund balances after the close of the plan year.
All requests for reimbursement under an HRA must be substantiated. The most common means of substantiation is the EOB statement provided by the employee's 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 statement to ascertain what has and has not been covered by insurance 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 requests for reimbursement.
Discrimination Testing and the Health Insurance Portability and Accountability Act (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 (FSA) plan 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.
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 the premium amount the employee must pay to continue 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 consider 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.