How a Health Reimbursement Arrangement (HRA) Works

Health Reimbursement Arrangements (HRAs) represent a type of employer-sponsored health benefit designed to help individuals manage their healthcare expenditures. These arrangements provide a structured way for employers to assist employees with various medical costs. By offering an HRA, businesses can provide a flexible benefit that supports employees in covering eligible health expenses, contributing to a comprehensive benefits package.

What an HRA Is and How It’s Funded

A Health Reimbursement Arrangement is an employer-funded plan that reimburses employees for qualified medical expenses. It is not an actual bank account that employees can access directly; instead, it operates on a “notional” basis, meaning it is a promise by the employer to reimburse expenses up to a set amount.

The funding for an HRA comes exclusively from the employer, and employees are not permitted to contribute their own money to the arrangement. Employers establish an annual limit for the amount an employee can be reimbursed. This limit provides predictability for the employer’s potential financial outlay for health benefits.

Unused funds within an HRA at the end of a plan year may or may not roll over to the next year. The decision to allow rollovers rests entirely with the employer and is determined by the specific plan design. If rollovers are not permitted, any unused balance is typically forfeited back to the employer.

Using Your HRA for Healthcare Costs

An employee first incurs a qualified medical expense and pays for it out-of-pocket. After paying, the employee then submits a claim for reimbursement, typically to their employer or a third-party administrator (TPA). This claim must include proof of the expense, such as detailed receipts, invoices, or an Explanation of Benefits (EOB) from an insurance provider.

The employer or TPA reviews the submitted claim to ensure it aligns with the HRA’s specific plan rules and that the expense is qualified under Internal Revenue Service (IRS) guidelines. If the claim is approved, the employer reimburses the employee up to the available balance in their HRA and within the established annual limit. Reimbursement typically occurs by check or direct deposit, sometimes integrated into the employee’s regular paycheck.

Healthcare costs are generally eligible for HRA reimbursement. These can include common out-of-pocket expenses such as deductibles, co-payments, and prescription drugs. Additionally, dental care, vision care, and in some HRA designs, health insurance premiums, are also commonly covered. The specific list of reimbursable expenses is defined by the employer within the IRS guidelines.

The Tax Advantages of HRAs

Health Reimbursement Arrangements offer distinct tax benefits for both employees and employers. For employees, reimbursements received from an HRA for qualified medical expenses are typically not considered taxable income. This tax-free treatment is authorized under Internal Revenue Code Section 105, which allows employees to cover eligible health costs without increasing their gross income.

Employers also realize significant tax advantages when offering HRAs. Contributions made to an HRA are generally tax-deductible business expenses for the employer. This deductibility reduces the employer’s overall taxable income, which can lower their tax liability. Furthermore, these contributions are often exempt from payroll taxes, leading to additional savings for the employer.

The tax treatment of HRAs differs from other health savings vehicles. Unlike Health Savings Accounts (HSAs), which allow both employer and employee contributions, HRAs are solely employer-funded. Unlike Flexible Spending Accounts (FSAs), where unused funds are often forfeited at year-end, HRAs may allow for rollover of unused balances depending on the plan design. The tax-free nature of reimbursements to employees and the tax-deductibility of contributions for employers make HRAs an appealing option for managing healthcare costs.

Common Types of HRAs and Their Applications

While the fundamental mechanism of an HRA involves employer-funded reimbursement, various types exist to suit different organizational structures and needs. Each type applies the core HRA concept with specific rules and applications.

The Qualified Small Employer HRA (QSEHRA) is designed for smaller employers, specifically those with fewer than 50 full-time equivalent employees, who do not offer a traditional group health plan. A QSEHRA allows these employers to reimburse employees for individual health insurance premiums and other qualified medical expenses. There are annual IRS-set limits on the amount an employer can contribute to a QSEHRA.

The Individual Coverage HRA (ICHRA) offers a broader application, available to employers of any size, and serves as an alternative to traditional group health plans. With an ICHRA, employers can reimburse employees for individual health insurance premiums purchased on the open market or through an exchange, as well as for other qualified medical expenses. This type of HRA provides employees with greater choice in their health plans while allowing employers to control costs by setting defined contributions.

The Excepted Benefit HRA (EBHRA) is typically offered alongside a traditional group health plan. Its scope is limited to covering “excepted benefits” such as dental and vision insurance premiums, as well as out-of-pocket costs like co-pays and deductibles. An EBHRA has an annual contribution limit, which is indexed for inflation, allowing employers to supplement their primary health offerings. Employees can participate in an EBHRA even if they decline enrollment in the employer’s primary group health plan.