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History of Health Reimbursement Arrangements (HRAs)

Written by: PeopleKeep Team
May 8, 2012 at 8:02 AM

At the beginning of the 20th century, when most employees worked at large manufacturing plants, larger employers provided self-funded, self-managed, onsite medical care in the form of a company doctor. This developed into today’s system in which employers pay for employee medical expenses through self-insured or fully-insured health benefits plans. These came to be known as defined benefit healthcare plans in which employees receive a defined benefit, typically unlimited healthcare, at uncertain cost to the employer. history of health reimbursement arrangements hras

HRAs Grew in Popularity as Deductibles Rose

In the 1960s-1990s, as deductibles and exclusions became more common in both self- and fully-insured health benefits plans, some employers instituted “arrangements” to reimburse employees for qualified medical expenses that were not covered by their health benefits plan. The federal government made these arrangements subject to ERISA (1974) and HIPAA (1996) to ensure that they provided equal benefits to similarly situated employees.

HRAs with Annual Maximums Became Popular in the late 1990s

In the late 1990s. health reimbursement arrangements with annual maximums, called “defined contribution plans,” became more popular—especially to reimburse employees for non-critical medical expenses (e.g. weight loss programs or prescription eyeglasses) which consumers had a higher propensity to incur than expenses for illness.

HRAs Formally Defined in 2002

On June 26, 2002 the IRS issued Notice 2002-45 and Revenue Ruling 2002-41 which clarified the definition of Health Reimbursement Arrangements (HRAs) and defined the criteria under which HRAs could be used. In general, this notice and ruling (and subsequent guidance) provides that:

(1)     HRAs must be funded solely by the employer

(2)     HRAs can only provide benefits for substantiated medical expenses

(3)     HRAs can allow the carryover of unused amounts to later years (i.e., the "use-it-or-lose-it” rules of Section 125 plans do not apply)

(4)     HRAs can reimburse employees for payment of personal health insurance premiums

(5)     HRAs may be used to reimburse former employees, including retirees, for qualified expenses

(6)     HRAs may create different benefits (both in size of allowances and type of medical expenses covered) for distinct classes of similarly situated employees. For example, HRA allowances for drivers could be different than those for managers, retail clerks, or call center workers.

To the U.S. Department of Treasury and IRS, HRAs are similar to arrangements employers have today to reimburse employees for incidental travel, meals, or office supply expenses. Employees pay such expenses themselves, submit receipts to their employer, and employers verify the receipts and reimburse employees tax-free.  Employers have virtually no reporting requirements.

To the U.S. Department of Labor, which has not yet formally commented on HRAs, HRAs are very different than reimbursing employees for non-medical expenses because the reimbursement of medical expenses and health insurance premiums are subject to HIPAA and ERISA employee privacy, disclosure and discrimination regulations.

The Comprehensive Guide to the Small Business HRA

Topics: Health Reimbursement Arrangement

Additional Resources

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