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HRA claim rules: what employers need to know

Written by: Gabrielle Smith
July 9, 2021 at 8:42 AM

Given the rising cost of employer-sponsored group health insurance plans, more and more employers, particularly small and medium size businesses, are looking to health reimbursement arrangements (HRAs) as a more affordable health benefits solution.

Through an HRA, employers simply offer a monthly allowance for their employees to purchase their own individual health insurance premiums and qualifying medical expenses. After making their purchases, employees submit their expenses to their employer for a tax-free reimbursement.

For an HRA to run smoothly, employees must be able to submit their expenses for reimbursement and get them processed in a timely manner. In this article, we’ll outline the IRS rules and plan documents that are required of employers to help you follow the appropriate timelines for processing and issuing reimbursements.

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Receiving and processing claims

In the context of an HRA, a “claim” is simply a request for reimbursement. An HRA claim begins when an employee submits proof of a qualified expense to their employer or their employer’s HRA software provider, like PeopleKeep.

In order for a claim to be processed, IRS rules call for “substantiation.” That just means an employee needs to provide proof to show that they incurred an HRA-eligible expense.

Proof of purchase could include the following:

  • A receipt
  • An invoice
  • An explanation of benefits (EOB) statement

Whatever form the proof of purchase takes, it’s only valid if it includes details about the type of service or product, the date of service or sale, and the cost of the product or service.

Once the employee has submitted proof of the expense, you must either approve or decline the request depending on whether or not the expense is HRA-eligible and if they have provided documentation with the requirements listed above.

Paying reimbursements

If you approve the reimbursement request, it moves on to the next step in the HRA claim process—paying the reimbursement.

You can reimburse your employees in any of the following ways:

  • Payroll
  • Direct deposit
  • Check
  • Cash

You’re responsible for paying the claim within the timeframe established in your plan documents. However, HRA claim rules don’t require employers to keep track of whether an employee has minimum essential coverage (MEC) for tax purposes.

Remember—only employees with MEC can receive health reimbursements that are free of income and payroll tax. If they forgo MEC, they should list their reimbursements as income at the end of the tax year.

Because your employee is responsible for their own insurance status, you’ll simply reimburse them for all of their eligible expenses tax-free, and they’ll report their reimbursements on their own.

Handling declined reimbursement requests and appeals

If you determine that the expense is ineligible, you must notify the employee within 30 days. In some cases, such as if your employee didn’t include proper proof of purchase, you may request additional information from the employee to help substantiate the request. In this case, you must give the employee 45 days to provide the additional information.

If an employee can’t provide additional documentation to support the request, then you must follow the appeals process detailed in your plan documents and follow Department of Labor guidelines and rules under the Employee Retirement Income Security Act (ERISA). It’s important to note that the person appointed to hear the appeal can’t be the same person who declined the original request for reimbursement.

Recording reimbursements and storing documentation

Finally, all employers have a legal obligation to keep records about all of the HRA reimbursements processed and issued throughout the tax year.

These records should include:

  • Information on requests received
  • Associated documentation
  • Whether or not the organization approved or declined reimbursement

The statute of limitations for HRA claims under IRS law is seven years, so it’s best practice to hang on to HRA claim documentation for a minimum of seven years.

Conclusion

Navigating the HRA claim rules can be a thorny task for small business owners. While it’s certainly possible to self-administer an HRA, businesses must be certain they’re up to the challenge of drafting plan documents, staying on top of employee communication, processing reimbursement requests, storing documentation, and more.

That’s what makes having an HRA administration software and award-winning customer support team on your side. At PeopleKeep, we make sure you maintain compliance with federal law and complex IRA rules while you get a simple, cost-controlled benefit you and your employees can afford.

Watch our product demos to see what PeopleKeep is all about

This article was originally published on April 18, 2018. It was last updated July 9, 2021.

Topics: Health Reimbursement Arrangement

Additional Resources

Setting up your first HRA? Get our HRA compliance toolkit for beginner's tips.
Learn how to help your employees get their health costs reimbursed.

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