Health Reimbursement Arrangement
A HRA is an employer-funded account to repay the unreimbursed medical expenses of employees, along with an option to carry unused funds forward. Only owners of Corporations may participate in the plan. Other entities may sponsor an HRA, but the owners will not be able to receive reimbursements through the plan.
A HRA account may reimburse any or all of the same expenses as a Section 125 Health Flexible Spending Account (FSA) and reimbursements of qualified medical expenses are tax-free.
Unlike a Health FSA, where the IRS requires the annual election to be available on the first day of the plan year, at the employers option only a portion of the HRA limit is added to each account once per month or pay period. This means no surprises and no big hits to the employer's checkbook. The employer will only be liable for a portion of each employee's HRA annual limit. Alternatively, the employer may fund the entire annual HRA on day one of the plan.
What benefits can an employer include in an HRA Plan? Medical expenses not covered by insurance.
Typical expenses include insurance co-pays and deductibles, eye exams, eyeglasses, eye surgery, contact lenses and solutions, dental visits, orthodontic care, medical exams, mental health care, chiropractic services, and prescription drugs.
What happens to the money that an employer puts into an HRA?
An employer establishes an HRA by adopting a formal plan and distributing a Summary Plan Description (SPD) to all eligible employees. The SPD describes, among other things, the amount of money available in each employee's personal health account for the coverage period. As eligible expenses are submitted, the employee's personal account is reduced and paid to them on a non-taxable basis.
At the employer's option, the plan can be designed such that dollars not spent by employees can be rolled over to fund the employee's expense in future years.
| Employer Benefits | Employee Benefits |
|---|---|
| Reimbursements of qualified claims are tax-deductible for the employer. | Supplements employees' insurance at no cost to them. |
| Combining a higher deductible insurance plan with an HRA can lower your company's health insurance cost. | Benefit is not taxed. |
| Administrative costs are tax deductible and can be paid by your dollars, your employees' dollars, or a combination of both. | Employees do not have to be covered under any other health care plan to participate. |
| Unused employee account balances can be rolled forward each year or forfeited by employees, depending on your benefits strategy. | Employees can be reimbursed for a health care plan that meets their or their families' specific needs, as opposed to a standard company plan. |
| HRAs compliment FSA plans and can enhance FSA plan participation levels. | Contributions that employers make can be excluded from employees' gross income. |
| Employers know their maximum expense related to their health care benefit. |
Important Info
- The plan must be in writing and a Summary Plan Description must be distributed to each plan participant.
- The plan may not discriminate in favor of highly compensated employees
- Employers are required to pay eligible medical expenses only to the extent of a participant's account balance.
- Employers maintaining HRA plans that cover more than 100 participants generally must file an IRS Form 5500 each year.
- HRAs can be restricted to cover only certain benefits, like prescriptions, or co-pays and deductibles.
- Eligible expenses must be incurred during the participant's period of coverage, but may be reimbursed at a future date. This is a plan design feature.
- HRA funds cannot be withdrawn or "cashed out" upon an employee's termination or retirement. Funds must always be used for qualified medical expenses.
- Plan design options are flexible. HRAs may be designed to roll unused balances forward from one year to the next, or forfeit to the employer at the end of the coverage period. The plan may, but is not required to, cover terminated or retired employees.
- Plan design options are flexible. HRAs may be designed to roll unused balances forward from one year to the next, or forfeit to the employer at the end of the coverage period. The plan may, but is not required to, cover terminated or retired employees.
- Owners are not eligible to participate in these plans unless they are the owners of a C Corporation.
HRA Plan Design Options
Comprehensive
The Comprehensive Plan pays all medical expenses not covered by insurance. These expenses include, but are not limited to, dental and vision fees, chiropractic services, co-pays, deductibles, and insurance premiums. This plan could be coupled with a higher deductible or limited coverage insurance arrangement or as an additional employee benefit.
Limited
A Limited Plan covers only a group of expenses such as dental or vision. It can also be restricted to a single medical expense such as prescriptions.
Insurance Only
The Insurance Only Plan allows employees to pay for employer-provided insurance coverage or individually owned policies for health, disability, or long-term care insurance.
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