Stand-alone Health Reimbursement Accounts (HRAs) allow employers to reimburse employee’s medical expenses tax-free. A stand-alone HRA is a type of Medical Reimbursement Plan. To understand how stand-alone HRAs work, it’s helpful to understand what an HRA is and how it can be used.
What is an HRA?
An HRA is a formal arrangement between the employer and employees to reimburse certain medical expenses tax-free.
We’ll cover the specific rules later, but the basic idea is that an HRA is like a business expense account for healthcare.
What is a Stand-alone HRA?
A stand-alone HRA is not paired with a group health insurance plan. Instead, the HRA is offered as a stand-alone health benefit - often as an alternative to group health insurance. Employers use stand-alone HRAs to reimburse employees for individual health insurance premiums and/or other out-of-pocket medical expenses.
That being said, because of healthcare reforms, stand-alone HRAs are limited for some employers. We’ll talk about this next.
Who Can Use a Stand-alone HRA?
According to current rules and regulations, stand-alone HRAs are a compliant reimbursement option for:
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Companies with one HRA participant (ex: a C-corp owner or one-person non-profit organization). Note: Tax benefits are limited for some types of owners.
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Companies offering a stand-alone HRA for retiree benefits.
Read more about one-person stand-alone HRAs here.
Example - How a Stand-alone HRA Works
To give you an idea of how a stand-alone HRA works, here is an example:
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Sally is an owner of a C-corporation with no W2 employees. She wants to save taxes on the cost of her personal health insurance premium, and other medical expenses.
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The company sets up a stand-alone HRA for Sally. When they set up the plan they determine a monthly contribution amount of $500.
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Sally purchases individual health insurance and pays $450/month for family coverage.
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Sally submits documentation to their HRA Software provider showing proof of her health insurance premium expense. The HRA Software verifies the expense and approves her request.
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Sally is reimbursed by the HRA $450/month.
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The unused $50 per month accrues and Sally can use that extra money to be reimbursed for her out of pocket medical costs (such as co-pays for doctor visits or prescriptions).
Stand-alone HRAs - A Closer Look at the Rules
To get a further understanding of stand-alone HRAs, it is helpful to understand the Health Reimbursement Account rules that govern HRAs. To summarize:
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Only employers may contribute, and there are no minimum or maximum contribution amounts.
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Eligible medical expenses are defined by the IRS, and the employer may restrict categories further. Expenses can include medical expenses and health insurance premium amounts.
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Documentation must be submitted for each eligible medical expense prior to reimbursement.
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Reimbursements are generally tax-deductible to the employer and tax-free to the employee.
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The employer has control over the plan design, including how much to contribute, employee eligibility, what happens to funds at the end of the plan year, eligible medical expenses, etc.
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HRAs are considered Section 105 group health plans, and as such, must comply with IRS, HIPAA, ERISA, COBRA, and the ACA rules. This includes having formal HRA Plan Documents.
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Employees do not have to be covered under any other health care plan to participate. HRAs may be paired with a group health insurance plan (an “integrated HRA”) or offered as a stand-alone benefit (a “stand-alone HRA”).
Understanding these rules helps you gain a more comprehensive understanding of how stand-alone HRAs can work for your business.
Plans Similar to Stand-alone HRAs
Stand-alone HRAs are one option for medical expense reimbursement. Similar reimbursement plans include:
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Healthcare Reimbursement Plans (HRPs) - Employer-established reimbursement plans that allow companies of any size to reimburse individual health insurance.
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Health Savings Accounts (HSAs) - Individual bank accounts owned by employees that allow for tax-free payment or reimbursement of eligible medical expenses.
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Health Flexible Spending Accounts (FSAs) - Employer-established benefit plans that allow for tax-free reimbursement of qualified medical expenses.
To read more about the different types of Medical Reimbursement Plans and see a comparison chart, click here.
What questions do you have about how stand-alone HRAs work? Leave a comment. We’ll help answer your questions.
