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Small Business Employee Benefits and HR Blog

Health Reimbursement Arrangements - How an HRA Works

May 20, 2015
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Health Reimbursement Arrangements, also called Health Reimbursement Accounts or HRAs, are a type of health plan used by employers to reimburse employees’ medical expenses. HRAs are both similar, and different, to other popular medical reimbursement plans such as Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs). In this article, we’ll cover what an HRA is and how an HRA works.How HRAs Work

What is a Health Reimbursement Arrangement (HRA)?

A Health Reimbursement Arrangement (HRA) is an employer-funded health plan that reimburses employees tax-free for eligible out-of-pocket medical expenses, including individual health insurance premiums.

HRAs are a simple tool used by employers to reimburse employees for medical expenses, and yet, because of their varied uses and new reforms, it is easy to be confused about how HRAs work today.

How Does an HRA Work?

Here is a simple illustration about how an HRA works:

  • The company sets HRA contribution amounts and designs the plan.

  • Employees incur medical expenses.

  • Employees submit a reimbursement request (usually to a third-party HRA administrator).

  • Once the request is approved, the company reimburses employees tax-free for the approved expense via payroll, check, or direct deposit.

What Types of Medical Expenses Can HRAs Reimburse?

First, the IRS defines what medical expenses and health insurance premiums can be reimbursed (see IRS Publication 502). Examples include doctor visit co-pays, prescriptions, dental expenses, eyeglasses, and individual health insurance.

Second, within what the IRS says is reimbursable, an employer can restrict categories further. For example, an employer may set up an HRA to reimburse only out-of-pocket medical expenses not covered by their group health insurance plan. When designing the HRA, employers must also take care to meet new HRA health reform rules.

What are the New HRA Health Reform Rules?

Prior to 2014, HRAs were a very flexible medical expense reimbursement tool. However, because of new health reform rules, employers are more limited in how they can use HRAs.

To summarize, because HRAs are considered a type of group health plan, they must comply with the new prohibition on annual limits. Because of these new rules, sometimes called the “Market Reforms,” the popular stand-alone HRA is no longer a compliant plan. However, some uses of HRAs are exempt from the Market Reforms, and may still be used today.

The three main “types” of HRAs available today are:

  1. Integrated HRA: An HRA integrated with a group health insurance plan.

  1. One-Person Stand-alone HRA: An HRA offered as a stand-alone benefit (not integrated with group health insurance). The HRA is often designed to reimburse individual health insurance premiums and other out-of-pocket medical expenses. (Note: Stand-alone HRAs with two or more participants are no longer compliant.)

  1. Retiree HRA: An HRA designed to reimburse employees only after retirement.

Read more about how HRAs can be used.

Alternatives to HRAs

If your company has used a stand-alone HRA in the past, or if you are looking to reimburse employees’ individual health insurance premiums, one solution is a Health Reimbursement Plan (HRP).

A Health Reimbursement Plan is a type of medical reimbursement plan designed for individual health insurance reimbursement.

Similar to stand-alone HRAs, Health Reimbursement Plans:

  • Offer employers a way to reimburse individual health insurance premiums tax-free,

  • Allow the employer to have full control of the cost of health benefits, and

  • Give employees choice over their healthcare.

Additionally, like an HRA, a Health Reimbursement Plan allows the company to advertise and offer health benefits to recruit and retain top-quality talent.

Conclusion

HRAs are a common way for employers to provide medical expense reimbursement. However, it’s 2015 and the rules have changed. We hope this article has given you an overview of how HRAs work today and alternative ways to reimburse employees for their individual health insurance.

Additional questions about how HRAs work? Download this complimentary guide on HRAs, or leave a comment below.

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