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Stand-Alone HRAs Simplified - How Do They Work?

Written by: Christina Merhar
January 28, 2015 at 7:00 AM

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:

  • 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.

  • Companies offering a stand-alone HRA for retiree benefits.

  • Companies with fewer than 50 employees offering a qualified small employer HRA (QSEHRA).

Example - How a Stand-alone HRA Works

To give you an idea of how a stand-alone HRA works, here is an example:

  • 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.

  • The company sets up a stand-alone HRA for Sally. When they set up the plan they determine a monthly contribution amount of $500.

  • Sally purchases individual health insurance and pays $450/month for family coverage.

  • 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.

  • Sally is reimbursed by the HRA $450/month.

  • 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:

  • Only employers may contribute, and there are no minimum or maximum contribution amounts.

  • 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.

  • Documentation must be submitted for each eligible medical expense prior to reimbursement.

  • Reimbursements are generally tax-deductible to the employer and tax-free to the employee.

  • 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.

  • 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.

  • 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 (a "group coverage HRA") or offered as a stand-alone benefit (a “stand-alone HRA”).

Plans Similar to Stand-alone HRAs

Stand-alone HRAs are one option for medical expense reimbursement. Similar reimbursement plans include:

  • Healthcare Reimbursement Plans (HRPs) - Employer-established reimbursement plans that allow companies of any size to reimburse individual health insurance.

  • Health Savings Accounts (HSAs) -  Individual bank accounts owned by employees that allow for tax-free payment or reimbursement of eligible medical expenses.

  • 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.

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Topics: Health Reimbursement Arrangement

Additional Resources

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Get our guide on how to offer health benefits with a small budget.