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Small Business Employee Benefits and HR Blog

HRA claim rules: What you need to know

April 18, 2018

A health reimbursement arrangement (HRA) is a type of tax-free personalized health benefit. HRAs are particularly popular among small businesses, as they are a great way for businesses to provide their workers with health benefits. These businesses often find the traditional group benefits method is too expensive, too complex, and too one-size-fits-all. With an HRA, employers reimburse employees tax-free for eligible health expenses up to a certain amount.

For an HRA to run smoothly, employees must be able to submit claims and get them processed in a timely manner. On the administrator side, IRS rules and plan documents require businesses to follow appropriate timelines for processing claims and issuing reimbursements. In the context of an HRA, a “claim” is a request for reimbursement.

Here is a step-by-step overview of HRA claim rules.

Receiving and processing reimbursements

An HRA claim begins when an employee submits proof of a qualified expense to their company or their company’s HRA software provider. IRS rules call for “substantiation,” which refers to proof an employee needs to show that they incurred an HRA-eligible expense.

Per the IRS, substantiation can come in the form of real-time processing, such as using a health debit card at the point of sale, or by way of submission of third-party information. A common form of third-party information is an Explanation of Benefits (EOB) statement. If the employee uses third-party information like an EOB, the statement or receipt must include 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, the company must either approve or decline the request. 

Handling declined reimbursement requests and appeals


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

However, if the company determines that the expense is ineligible, they must notify the employee within 30 days. Sometimes, the company may request additional information from the employee to help substantiate the request. In this case, the company must give the employee 45 days to provide the additional information.

If an employee can’t provide additional documentation to support the request, the company must follow the appeals process detailed in its plan documents. They must also 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. 

Paying reimbursements


If the claim is eligible for reimbursement, the company should pay the claim within the time frame established in its plan documents. Businesses have a few different options for paying HRA claims, including payroll, cash, check, or direct deposit.

Additionally, HRA claim rules don’t require businesses to keep track of whether an employee has minimum essential coverage (MEC) for tax purposes. Rather, the company simply reimburses eligible expenses tax-free. Employees must maintain MEC to receive health reimbursements free of income and payroll tax. If they forgo MEC, they should list their reimbursements as income at the end of the tax year.

Recording reimbursements and storing documentation

Businesses have a legal obligation to keep records about HRA reimbursements. These records should include information about requests received, associated documentation, and whether the company approved or declined reimbursement. The statute of limitations for HRA claims under IRS law is seven years, so it’s a 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. At each stage, businesses must also maintain strict compliance with federal law and complex IRS rules. This is why many employers choose HRA administration software to help them manage their benefit. Review your options with your personalized benefits provider. 

The Comprehensive Guide to the Small Business HRA 

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