As your organization sets up and administers a health reimbursement arrangement (HRA), employees will undoubtedly have a lot of questions about how the benefit works.
After all, the Kaiser Family Foundation finds that nearly half of Americans are used to getting group health insurance from their employer—not purchasing their own plan and getting paid back through a reimbursement model. Because of this, it’s essential to educate your employees on how to use their HRA.
We’ve rounded up five of the most common questions employees have about HRAs to help you educate your employees about their new health benefit.
1. How does a health reimbursement arrangement work?
An HRA is a formal health benefit that allows employees, their spouses, and their dependents to get tax-free reimbursements on medical expenses and individual health insurance premiums. Employers provide a monthly allowance for employees to spend on their own, and any used funds at the end of the year goes back to the employer.
Employees get reimbursed through a three-step process:
Step 1: Employees make healthcare purchases with their own money
First, employees will simply purchase the individual health insurance premiums they need and accrue any other qualifying medical expenses. Depending on the type of HRA offered, employers can choose to limit the benefit to a premium-only HRA, or open it up to all of the out-of-pocket expenses outlined in IRS publication 502.
Step 2: Employees submit proof of purchase
After the employee incurs an eligible expense, they’ll submit proof of the expense to their organization.
This documentation must include:
- The name of the item or service
- The cost of the item or service
- The name of the vendor
- The date of purchase
Invoices, receipts, or an explanation of benefits from the employee’s insurer typically satisfies this requirement. Depending on the item that’s being requested for reimbursement, a doctor’s note or prescription may also be necessary.
Step 3: The employer reimburses employees
Finally, the organization will review the employee’s submission and, if it qualifies, reimburse the employee from their monthly allowance. Typically, employers include the reimbursement in the employee’s next regular paycheck without including it as gross income—and without payroll taxes.
If the expense doesn’t qualify, the organization must follow a declined claims and appeals process outlined in their HRA plan documents.
2. What can I get reimbursed through a health reimbursement arrangement?
The HRA-qualified items outlined in IRS Publication 502 include over 200 eligible expenses. These expenses can be broken down into two categories: 1) insurance premiums, and 2) out-of-pocket expenses.
The following types of insurance premiums are all HRA-qualified, provided they’re not already paid with pre-tax dollars:
- Major medical individual health insurance premiums
- Dental care and vision care premiums
- Medicare Part A or B, Medicare HMO, and employer-sponsored health insurance premiums
- Medicare Advantage and Supplement premiums
- COBRA premiums
A few popular out-of-pocket expenses that are HRA-qualified are:
- Doctor’s visits
- Prescription drugs
- Dental care
- Mental health counseling
- Chiropractic care
3. What are the advantages of health reimbursement arrangements?
HRAs are a great health benefit for employees regardless of their age, insurance status, or budget. Here are just a few reasons why:
Rather than being lumped into a one-size-fits all group health insurance plan with very limited options, an HRA empowers employees to choose their own individual health insurance plan that works for them. Each employee can use the benefit differently, so it works equally well for young employees still on their parents’ insurance plan as well as older, Medicare-eligible employees.
The cost of employer-sponsored group health plans is steadily rising, and in turn, increasing the cost of group premiums for both the employer and employees every year. With an HRA, there’s a set dollar amount in place that stays the same month-to-month and year-to-year, making for a reliable and budget-friendly benefit.
HRAs are administered on a tax-free basis for employers, and employees are also spared from income tax—so long as they’re covered by an insurance policy that meets MEC requirements. That means employees don’t need to report the money they get reimbursed as income at the end of the year.
4. How do I find an individual health insurance policy?
However, employees can also shop for an individual or family health insurance policy with the help of a health insurance agent or broker, or by contacting a health insurance company directly.
PeopleKeep partners with KindHealth, a health insurance concierge service, that lets your employees talk with licensed health insurance professionals to make sure they have the information they need to choose a plan that meets their specific needs.
5. How is a health reimbursement arrangement different from a health savings account?
Employees often confuse HRAs and HSAs, however, they’re two separate benefits that each work a little differently.
The major differences between HRAs and HSAs are:
- Who owns the account
- While HRAs are owned by the employer, HSAs are owned by the employee.
- Who can fund the account
- Only the employer makes HRA contributions, but both the employer and the employee can contribute to an HSA.
- What kind of health plans you can have with the account
- In order to participate in an HSA, an employer must be enrolled in a HSA-qualified plan, such as a high deductible health plan. No specific health plan is required to participate in the HRA, however, employees need a plan that meets MEC in order to get tax-free reimbursements.
- Who keeps employer contributions when an employee leaves the company
- After an employee leaves their job, their remaining HRA allowance stays with the organization, while HSA contributions stay with the employee.
While an HRA may be a new benefit for many of your employees, the answers in this article cover everything they need to understand how it works, what they can get reimbursed, and why it’s a valuable health benefit for employees at every life stage.
If your employees have more specific questions, don’t hesitate to reach out to our award-winning customer support team today.
This article was originally published on May 28, 2013. It was last updated June 25, 2021.