What is a Health Reimbursement Arrangement (HRA)? 

HRAs have been known as personal saving accounts, personal care accounts, defined contribution plans, or consumer-driven health care plans. In 2002, when the IRS finally issued guidelines for employer-provided medical reimbursement accounts, they decided to call it a Health Reimbursement Arrangement, or HRA. One major difference separates HRAs from most other pre-tax benefit accounts: only employers can contribute to the HRA. 

Important Features... 

HRA funds can be used for IRS approved expenses as long as expenses available under the HRA were incurred by employee/dependent during the period of HRA eligibility; these expesnes can not be reimbursed by any other source, for example: other insurance plans.

HRA funds "roll-over" from year to year or have all or a portion of the unused funds forfeited at the end of the year. If employee terminates, HRA funds are no longer available to that employee. Funds are then refunded to the employer at the end of the year for any employee that terminates employment and chooses not to continue their HRA plan, in accordance with COBRA regulations. The employer can choose to allow the employee to keep their HRA funds after termination, but this can increase the administrative costs and cause additional financial liabilities for the employer. HRAs can reimburse insurance premiums where as with FSAs you aren't allowed.

An HRA's period of coverage is not required to be 12 months. An HRA does not have the rule of where only expenses incurred during the current coverage period can be reimbursed. This means expenses incurred during the current year can be reimbursed in the following year as long as the employee was a participant when the expense was incurred.

If an employer chooses to offer both an HRA and Medical FSA, the IRS has authorized employers to design HRAs to pay after the Medical FSAs. If the employee participates in both the HRA and Medical FSA, they can use the FSA first and then use the HRA, which reduces FSA forfeitures under the "use-it-or-lose-it" stipulation. 

How do Employers Utilize an HRA? 

One way employers are using HRAs is with expenses not reimbursed by health insurance companies. With an HRA, the employer funds an account from which the employee is reimbursed for qualified medical expenses, such as deductibles, co-pays, vision care, prescriptions, medical insurance, and most dental expenses.

Over-the-counter drugs may also be reimbursed through an HRA providing they concurred with the IRS Section 105 and explained in Section 213. 

Reimbursements are not taxed to the employee, and are deductible by the employer.

Any funds reimbursed from an HRA are exempt from the employer's payroll taxes and Social Security taxes.

HRAs provide employers with flexibility in their Plan design. Types of services can be set as a limit for reimbursement by an HRA. HRAs do not require funding up front. Employers can contribute funds in a whole sum or by installments throughout the year. This allows the employer's assets to be freed up for other uses. This is where HRAs and FSAs differ, where the employer can be liable for the full amount on the first day of the plan. The employer also determines the maximum amount of funds to be contributed to an HRA. In contrast to the "use-it-or-lose-it" stipulation of cafeteria plans, the employee gets to "roll-over" any of their remaining HRA funds. Depending on the options elected by the employer, their employees can claim reimbursement expenses at the time services are rendered, accumulate and claim reimbursements in the future, or save the funds in the HRA for a retiree health benefit, Employee Retirement Income Security Act of 1974 (ERISA). 

There are no restrictions on the type of health plans that can be implemented with an HRA, so the employer can pick the best policy for the employees. Also, employees are able to choose their own healthcare providers and pick the best priced healthcare they find.

How do Employees Utilize an HRA? 

Employees who normally do not have medical benefits and do not want the value of benefit plans, will have access to HRA funds to pay for allowable expenses. Examples of allowable expenses may include: medically necessary alternative treatments (chiropractors, masseuses), medically necessary obesity treatments, laser eye surgery, hearing aids and their batteries, voice-enhanced telephones, and other benefits.  Please keep in mind that the HRA plan is designed by the employer.  If you have questions about what is covered in your company's plan, please contact SDSA Customer Service or your HR department. 

Employee funds that "roll-over" each year can accumulate and prevent costly future illnesses or injuries from destroying their wallets, up to the maximum account allowance preset by the employer.

Frequently Asked Questions... 

Q: Is a Trust Account required? 
A: No, not by IRS Code, but possibly by ERISA. No trust is required if HRA reimbursements are made directly out of the general assets of the employer. 

Q: Are Account Earnings Taxable? 
A: This is not applicable if reimbursements are made directly out of the general assets of the employer. If the HRA is funded by a Voluntary Employee Beneficiary Association (VEBA) trust account, earnings are generally not taxable. 

Q: Who Can Establish an HRA Plan? 
A: Sole proprietors, partnerships, regular corporations, S corporations, limited liability companies (LLCs), professional corporations (PCs), and 501(c) 3 tax-exempt non-profit organization can establish an HRA plan. Individuals that can not personally participate in an HRA include sole proprietors, partners, in most cases: members of an LLC, or individuals owning more than 2% of an S corporation. Although these specific owners can not participate, they can still administer an HRA plan for their employees and benefit from the write-off. 

Q: Is there a IRS reporting requirement? 
A: Employers who cover more than 100 participants must file an IRS Form 5500 within seven months of the end of the plan year. 

Q: Is a Plan Document required? 
A: The IRS Code requires that the plan be in writing and that every participant receives a Summary Plan Description.