A health reimbursement arrangement (HRA) is an IRS-approved, employer-sponsored health benefit that allows participants to receive reimbursements for a wide variety of out-of-pocket healthcare expenses and certain health insurance premiums.
HRAs can be used to reimburse employees for all items outlined in IRS Publication 502, which includes over 200 eligible expenses. Because there are so many options to choose from, we’ve put together a summary to help you and your employees understand what an HRA can cover.
This article digs into the two main reimbursement categories: insurance premiums and out-of-pocket expenses. We’ll also highlight each category’s popular medical services and products, and what documents employees need to get reimbursed.
How does an HRA work?
With an HRA, you offer your employees a monthly or annual benefit allowance. Depending on which HRA you have, there may be annual allowance limits. Once an employee incurs a medical-related expense, they submit their expense for reimbursement.
If the expense is for a qualifying cost and the employee provides all of the substantiation requirements needed, you can process the request for reimbursement. This gives employees more freedom and flexibility in using their health benefits.
Now that you know how HRAs work, let’s go over the two main categories that are eligible for reimbursement.
1. Insurance premiums
The first category we’ll cover is insurance premiums. According to PeopleKeep customer data, individual health insurance premiums are the number one expense HRA participants get reimbursed.
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
- This includes plans on the federal Health Insurance Marketplace as well as state marketplaces
- Dental and vision plan premiums
- Medicare premiums, including premiums for Parts A and B, Medicare HMO, Medicare Advantage, and Medicare Supplement plans
- Long-term care premiums
- COBRA premiums
Because insurance premiums are a recurring expense, employees typically only need to submit their proof of premium amount once each year. Employees will then receive automatic reimbursements without further review of recurring costs as long as they match the amount, provider, and time period of their previously approved expenses.
2. Out-of-pocket expenses
Next, there are out-of-pocket medical expenses. This includes any qualifying medical expenses an employee’s health plan doesn’t already cover or anything their insurance company expects them to pay for on their own.
Qualifying out-of-pocket expenses can include medical costs, dental care, vision care, and more. Depending on what kind of out-of-pocket costs your employees are paying, they’ll need to submit different documents to get reimbursed.
There are three categories of out-of-pocket medical expenses that are reimbursable with different forms of documentation:
- Costs that are reimbursable with proof of an incurred expense
- Costs that are reimbursable with proof of an incurred expense and a doctor’s note
- Costs that are reimbursable with proof of an incurred expense and a prescription
Costs that are reimbursable with proof of an incurred expense
Some out-of-pocket expenses only require the minimum amount of documentation to get reimbursed. This kind of proof of an incurred expense is typically in the form of a receipt or an invoice.
Your employees’ proof must include the following:
- The name of the item or medical service
- The name of the vendor
- The date of purchase
This category of costs would include any qualifying medical expenses that employees must pay before they meet their deductible or out-out-pocket maximum and copayments.
A few popular eligible expenses in this category are doctor’s visits for a physical exam, prescription drugs, diagnostic services, mental health counseling, physical therapy, and chiropractic care.
However, these expenses don’t have to be large. This category also includes several over-the-counter items, like cold medicine, sunscreens, asthma medicine, eyeglasses and contacts, allergy medicine, cough syrup, and so much more.
Many HRAs don’t roll over year-to-year, so these are the things employees may choose to stock up on before the new plan year starts to take full advantage of the benefit.
Costs that are reimbursable with proof of an incurred expense and a doctor’s note
Next, let’s talk about reimbursable expenses that need proof and a doctor’s note. Many over-the-counter healthcare products are eligible for reimbursement, but some will need a doctor’s note explaining that they’re medically necessary.
For these items to qualify for reimbursement, the doctor’s note needs to include:
- The specific names of the items recommended
- What medical condition the item is treating
- The item can’t just be for general health or wellness
- Signature of a licensed medical practitioner
Some things that are reimbursable with a doctor’s note are fitness programs, dental veneers, massage therapy, dietary supplements, exercise equipment, and dermatology products.
Costs that are reimbursable with proof of an incurred expense and a prescription
The last category includes covered expenses that are reimbursable with proof and a prescription. Common items that employees get reimbursed for with a prescription include vitamins and medicated toothpaste.
While prescription drugs are reimbursable through an HRA, employees don’t need to submit their prescriptions to get reimbursed. This is because a prescription drug already requires a doctor's prescription to purchase from the pharmacy, so employees won’t be asked for their prescription information again.
What are examples of ineligible HRA expenses?
Anything not listed on IRS Publication 502 is ineligible for reimbursement with tax-free HRA funds.
Examples of items ineligible for reimbursement are:
- Cosmetic procedures or surgery
- Marriage counseling
- CPR classes
- General dental products, such as standard toothpaste
- Diapers or diaper services
- Funeral expenses
- Business expenses
- Hair removal or hair transplants
- Hand lotion
- Maternity clothes
- Swimming lessons other than those for therapy
- General vitamins and dietary supplements without a doctor’s note
While this list isn’t exhaustive, it provides an idea of what expenses you can’t have reimbursed with an HRA.
Not seeing what you're looking for? Consider a health stipend
If the HRA-eligible expenses don’t cover what you’re looking to reimburse with an HRA, you have other options for providing a quality health benefit to your employees.
A health stipend works similarly to an HRA, and allows you to reimburse your employees for their medical care costs, out-of-pocket expenses, and health insurance premiums. However, a health employee stipend has fewer regulations or restrictions than an HRA, meaning you can choose to reimburse more items than what the IRS allows.
For example, you can’t reimburse employees for a weight loss program under an HRA unless it is a doctor-supervised program with a medical determination letter. However, you could choose to reimburse an employee for a general weight loss program with a health stipend.
Health stipends also have fewer substantiation requirements to reimburse employees. In fact, all covered expenses in IRS Publication 502 can’t require proof of purchase or an explanation of benefits with a stipend, as doing so would change reimbursement rules and subject your benefit to additional requirements.
But, there are some exceptions to the substantiation rules. For example, you can require substantiation of direct primary care network membership fees and healthcare sharing membership fees.
Health stipends are also taxable for both the employer and the employee, making tax-free HRAs a better option for organizations that want to save on their federal taxes. Additionally, there are no annual contribution limits with a stipend.
So, who benefits from a health stipend instead of an HRA? Health stipends are an excellent option for 1099 contractors and international workers who can’t be offered an HRA. It also benefits employees who receive advance premium tax credits (APTCs).
An HRA is an ideal way for organizations of all sizes to offer their employees a comprehensive and affordable health benefit. Communicating how employees can use their HRA ensures your employees fully utilize their health benefits and allows you to recruit and retain employees looking for a flexible benefits package.
If you’re ready to offer your employees an HRA or health stipend, PeopleKeep can help! Our HRA and employee stipend administration software makes it easy to set up a health benefit in minutes. Schedule a call with us today to see how HRAs and stipends can work for you.
This article was originally published on February 10, 2020. It was last updated on October 28, 2022.