Introduction to Health Reimbursement Arrangements
A health reimbursement arrangement (HRA), commonly referred to as a health reimbursement account, is an IRS-approved, employer-funded, tax-advantaged personalized health benefit that reimburses employees for out-of-pocket medical expenses and individual health insurance premiums.
An HRA is not health insurance. A health reimbursement arrangement allows the employer to make contributions to an employee's account and provide reimbursement for eligible expenses. An HRA plan is an excellent way to provide health insurance benefits and allow employees to pay for a wide range of medical expenses not covered by insurance. It's an especially good option for small businesses that previously could not afford to offer benefits but still want to retain control over their benefits spending, as the business can choose the amount of the allowance to offer its employees.
Because of federal legislation passed in December 2016, the qualified small employer health reimbursement arrangement (QSEHRA) is now available to businesses with fewer than 50 employees.
A QSEHRA is the perfect option for small businesses that want control over their benefits budget. Learn more about the QSEHRA to see how you can help your employees without breaking the bank.
Health Reimbursement Arrangements Are Notional
Health reimbursement arrangements are notional arrangements; no funds are expensed until reimbursements are paid. Through HRAs, employers reimburse employees directly only after the employees incur approved medical expenses. This feature is especially helpful for businesses that want to retain control over their cash flow.
Some Health Reimbursement Arrangements Have Annual Limits
Like a health savings account (HSA), there is a limit to the amount of money an employer can contribute to certain HRAs. In 2018, annual employer contributions for QSEHRAs are capped at $5,050 for a single employee and $10,250 for an employee with a family.
Health Reimbursement Arrangement Eligible Expenses
A health reimbursement arrangement can reimburse any expense considered to be a qualified medical expense under IRS Section 213 of the Internal Revenue Code, including premiums for personal health insurance policies. Because an HRA can reimburse medical expenses as well as premiums, it's a very valuable benefit for employees in many insurance situations.
To see a list of eligible expenses, see our eligible expense tool.
Within IRS guidelines, employers may restrict the list of reimbursable expenses in any way they choose for their HRA plan.
Health Reimbursement Arrangements Allow Some Rollover
Health reimbursement arrangement balances may roll forward from month to month or from year to year, depending on which HRA plan an employer chooses. QSEHRAs may roll forward from month to month only; no annual rollover is permitted.
Under one-person stand-alone HRAs or integrated HRAs, however, employers can allow balances to accrue from one year to the next. They may also design the program not to allow annual rollover.
Employers may also allow employees to have access to their health reimbursement arrangement accounts after retirement.
Health Reimbursement Arrangement Administration Reporting Features
HRA administration reporting features make real-time monitoring of HRA liabilities, reimbursements, and utilization easy. Employers can change plan benefits at any time or cancel the entire plan at any time, provided those offering QSEHRAs supply employees with the required notice.
Editor's Note: This post was originally published in January 2012.
What questions do you have about health reimbursement arrangements (HRAs)? Leave a comment and we'll help answer them.