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Small Business Employee Benefits and HR Blog

How HRA Distributions Work

July 12, 2013
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Distributions from an HRA are simple, but there are IRS guidelines an employer and employees must follow. An HRA is a Health Reimbursement Arrangement. An HRA is an IRS-approved, employer-funded plan used to reimburse employees for medical expenses. An HRA is not health insurance, but can be used to supplement health insurance benefits and pay for a range of medical expenses not covered by insurance, including many insurance premiums. 

An HRA is most commonly used as either a stand-alone HRA or an integrated HRA, but can also be used as a retiree HRA, wellness HRA, limited HRA, etc. (See: Types of HRA plans.)HRA Distribution

HRA Definition

To understand how HRA distributions work, first it's important to understand the basic definition of an HRA. The IRS outlines the definition of an HRA distributions in IRS Publication 969:

  • "A health reimbursement arrangement (HRA) must be funded solely by an employer.

  • The contribution cannot be paid through a voluntary salary reduction agreement on the part of an employee. 

  • Employees are reimbursed tax free for qualified medical expenses up to a maximum dollar amount for a coverage period. 

  • An HRA may be offered with other health plans, including FSAs.

  • Unlike HSAs or Archer MSAs which must be reported on Form 1040 or Form 1040NR, there are no reporting requirements for HRAs on participant's income tax return."

  • HRAs are notional arrangements, meaning pre-funding of third-party bank accounts is not required.

Tip: A more detailed definition of HRAs is also outlined in IRS Notice 2002-45 (HRAs).

How HRA Distributions Work

According to the IRS, distributions from an HRA:

  • Must be paid to reimburse employees for qualified medical expenses they have incurred. 

  • The expense must have been incurred on or after the date the employee was enrolled in the HRA.

  • If an HRA Debit card is used (not recommended), the card must meet certain substantiation methods and meet IRS guidelines detailed in Revenue Ruling 2003-43.

  • If any distribution is, or can be, made for other than the reimbursement of qualified medical expenses, distributions made in the current tax year are included in gross income. 

  • Reimbursements under an HRA can be made to current and former employees, and spouses and dependents of those employees (as long as the employer's HRA plan allows it).
  • Amounts that remain at the end of the year can generally be carried over to the next year, as specified in the HRA plan documents. The employer is not permitted to refund any part of the balance to employees. 

HRA Software helps an employer easily manage and track HRA distributions. HRA Software also helps easily communicate to employees what types of expenses are eligible for reimbursement, how to submit their request for reimbursement, and how their employer will reimburse them. 

The Comprehensive Guide to the Small Business HRA

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