Understanding Health Reimbursement Arrangements (HRAs): A Comprehensive Guide

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Health Reimbursement Arrangements (HRAs) have become a popular employer-funded plan that provides reimbursement for qualified medical expenses and insurance premiums. These arrangements offer tax benefits to both employers and employees. In this article, we will delve into the details of HRAs, including how they work, the types available, their benefits and limitations, and how they differ from other healthcare arrangements.

How a Health Reimbursement Arrangement (HRA) Works

A Health Reimbursement Arrangement is a plan established by an employer to cover medical expenses for employees. The employer determines the contribution amount to the plan, and employees can request reimbursement for actual medical expenses up to the designated amount. It's important to note that HRAs are not accounts, so employees cannot withdraw funds in advance. Instead, they must incur the expense first and then seek reimbursement. In some cases, employers provide an HRA debit card for immediate reimbursement at the time of service.

Types of HRAs

There are several types of HRAs, each with its own set of rules and features. Let's explore some of the most common types:

1. Qualified Small Employer Health Reimbursement Arrangement (QSEHRA): This type of HRA is designed for businesses with fewer than 50 full-time employees. Also known as a small business HRA, the QSEHRA can be used to offset health insurance coverage or repay medical expenses that would otherwise be uncovered. The contribution limits for 2022 are up to $5,450 per year for individuals and up to $11,050 per year for employees with families. In 2023, these limits change to $5,850 per individual and $11,800 per family.

2. Individual Coverage HRA (ICHRA): Introduced in January 2020, the ICHRA allows employers to offer their employees a new type of HRA that covers individual health insurance premiums. Employees can use these HRAs to purchase their own comprehensive individual health insurance with pretax dollars, either on or off the Affordable Care Act's health insurance marketplace. Additionally, ICHRAs can reimburse employees for qualified health expenses such as copayments and deductibles. Eligibility for premium tax credits under the Affordable Care Act depends on the employer's ICHRA meeting minimum affordability standards.

3. Excepted Benefit HRA (EBHRA): Employers that provide traditional group health insurance can also offer EBHRAs to reimburse employees for up to $1,950 a year in qualified medical expenses. Unlike other HRAs, EBHRAs can be used even if employees decline group health insurance coverage. However, these funds cannot be used to purchase comprehensive health insurance. They can, however, be used for short-term health insurance, dental and vision insurance premiums, and other qualified medical expenses.

Benefits of Health Reimbursement Arrangements

HRAs offer several benefits to both employers and employees. Let's take a closer look:

1. Reimbursement for Qualified Medical Expenses: HRAs can be used to pay for a wide range of qualified medical expenses, including prescription medications, annual physical exams, crutches, birth control pills, psychological or psychiatric care, substance abuse treatment, and transportation costs for medical care, among others.

2. Coverage for Health Insurance Premiums: Depending on the type of HRA, funds can be used to reimburse health insurance premiums, including vision and dental insurance premiums. This provides employees with greater flexibility and helps offset the cost of insurance coverage.

3. Tax Advantages: Reimbursement dollars received through HRAs are generally tax-free for employees. Additionally, employers can claim a tax deduction for the reimbursements they make through these plans.

Limitations of Health Reimbursement Arrangements

While HRAs offer numerous benefits, they also have certain limitations that should be considered. Here are a few key limitations to keep in mind:

1. Employer Control: Employers have control over the HRA, including contribution amounts, eligible expenses, and plan rules. This means that employees may have limited flexibility in choosing their healthcare options, as they must adhere to the guidelines set by the employer.

2. Non-Portability: HRAs are typically tied to the employer, meaning that when employees leave their jobs, they may lose access to the HRA funds. However, there are exceptions for some types of HRAs, such as the Individual Coverage HRA (ICHRA), which can be portable if the employee continues to meet the plan requirements.

3. Limited Contribution Amounts: HRAs have contribution limits set by the employer. These limits may not fully cover all medical expenses, especially for employees with high healthcare needs. It's important for employees to understand the maximum reimbursement amount available to them.

4. Use-It-or-Lose-It: Some HRAs operate on a "use-it-or-lose-it" basis, meaning that unused funds at the end of the plan year are forfeited. However, certain HRAs, such as the QSEHRA, allow for rollover of unused funds to the following year, up to a certain limit.

5. Coordination with Other Health Plans: HRAs may have coordination requirements with other health plans. For example, an employee may need to be enrolled in a specific health insurance plan in order to be eligible for HRA reimbursement. It's important to understand these coordination rules to maximize the benefits of the HRA.

6. Compliance Requirements: HRAs are subject to various compliance requirements, including IRS rules and regulations. Employers must ensure that their HRA plans adhere to these requirements to maintain their tax advantages and avoid penalties.

Differences between HRAs and Other Healthcare Arrangements

HRAs are just one type of healthcare arrangement, and it's essential to understand how they differ from other options. Here are a few key distinctions:

1. Health Savings Accounts (HSAs): While both HRAs and HSAs offer tax advantages for healthcare expenses, there are significant differences. HSAs are owned by the employee, and funds can be carried over from year to year. In contrast, HRAs are owned by the employer, and unused funds may not be portable or carried over. Additionally, HSAs require the employee to have a high-deductible health plan (HDHP), while HRAs do not have this requirement.

2. Flexible Spending Accounts (FSAs): FSAs are similar to HRAs in that they provide reimbursement for qualified medical expenses. However, FSAs are typically funded by the employee through salary deductions, while HRAs are funded solely by the employer. FSAs also have an annual contribution limit, which may be lower than the limits for HRAs.

3. Traditional Group Health Insurance: Traditional group health insurance is a comprehensive coverage option provided by employers. HRAs can be used in conjunction with group health insurance to reimburse certain expenses not covered by the insurance plan. In contrast, HRAs themselves are not insurance plans but rather a mechanism for reimbursing expenses.

Conclusion

Health Reimbursement Arrangements (HRAs) are employer-funded plans that provide reimbursement for qualified medical expenses and insurance premiums. They offer numerous benefits, including reimbursement for a wide range of medical expenses, coverage for health insurance premiums, and tax advantages for both employers and employees. However, HRAs also have limitations, such as employer control, non-portability, limited contribution amounts, and compliance requirements. Understanding the differences between HRAs and other healthcare arrangements is crucial for individuals and employers when making healthcare decisions.