A health reimbursement arrangement (HRA) is an IRS-approved, employer-sponsored health benefit that allows participants to receive reimbursements for various out-of-pocket healthcare expenses and certain health insurance premiums.
Depending on how you design your benefit and which type of HRA you offer, you can reimburse employees for all items outlined in IRS Publication 502, which includes more than 200 eligible expenses. Because there are so many options, we’ve compiled 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 outline 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 your HRA type, the IRS may set maximum annual contribution limits that cap how much of an allowance you can offer. Once an employee incurs a medical-related expense, they submit proof of purchase for reimbursement through their HRA.
If it’s a qualified expense and the employee provides all the substantiation requirements needed, you can process the request for reimbursement up to their set allowance amount. Employees will receive a tax-free reimbursement if they have a health insurance plan that meets minimum essential coverage (MEC). The ability to choose their health plan and the medical services and items they need gives employees more freedom and flexibility over their health benefits.
Lastly, unlike a health savings account (HSA), unused HRA funds stay with you if an employee leaves your organization.
If you offer a qualified small employer HRA (QSEHRA) or an individual coverage HRA (ICHRA), you can reimburse employees for out-of-pocket medical expenses and individual health insurance premiums. However, you can’t reimburse employees for insurance premiums if you offer a group coverage HRA (GCHRA).
Now that you know how HRAs work, let’s review the two main categories eligible for reimbursement.
1. Insurance premiums
The first category we’ll cover is insurance premiums. You can only reimburse premiums with a QSEHRA or ICHRA. According to PeopleKeep customer data, individual health insurance premiums are the number one expense employers reimburse QSEHRA and ICHRA participants for.
The following types of insurance premiums are all HRA-qualified, provided the employee didn’t already purchase them with pre-tax dollars:
- Major medical individual health plan premiums
- This includes plans on public health exchanges like the federal Health Insurance Marketplace and state-based marketplaces. It also includes many off-exchange plans that meet MEC standards
- 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 health coverage premium payments are recurring, employees typically only need to submit their proof of their monthly premium amount once each year, if their benefits administrator allows it. Employees will then receive automatic reimbursements without further review of recurring costs if there are no changes to the amount, provider, and time period of their previously approved expense.
Depending on your HRA type and plan design, you can reimburse health plan premiums only or out-of-pocket expenses in addition to premiums.
2. Out-of-pocket expenses
Next, there are out-of-pocket medical expenses. This includes any qualifying medical costs an employee’s health plan doesn’t already cover or anything their insurance company expects them to pay for on their own. If an employee has unused funds, out-of-pocket expenses are a good way to spend them.
Qualifying out-of-pocket expenses include medical treatment, dental care, vision care, occupational therapy, motion sickness medication, mental health counseling, and more. Depending on what kind of out-of-pocket costs your employees incur, they must submit different documents for reimbursement.
Depending on what an out-of-pocket medical expense is, it will have one of the following sets of documentation requirements:
- Proof of an incurred expense
- Proof of an incurred expense and a doctor’s note
- 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 proof of an incurred cost is typically in the form of a receipt or an invoice.
When making a claim for reimbursement, 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 plan deductible or out-of-pocket maximum, such as 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 drugs and items, like cold medicine, sunscreens with SPF 15 or higher, asthma medicine, prescription eyeglasses and contact lenses, allergy medicine, acne treatment, cough syrup, and 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 discuss qualified expenses requiring proof and a doctor’s note. Many over-the-counter items 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 reimbursable items or services with a doctor’s note are fitness programs, dental veneers, massage therapy, dietary supplements, exercise equipment, special foods, and dermatology products.
Costs that are reimbursable with proof of an incurred expense and a prescription
The last category includes qualified expenses reimbursable with proof and a prescription. Eligible items that employees can receive reimbursements 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. Therefore, you don’t need to ask employees for their prescription information again.
See the complete list of eligible HRA expenses in our Publication 502 tool
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:
- Adoption fees
- Cancer insurance premiums
- 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 IRS Publication 502 doesn’t include 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 give your employees money 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 reimburse more eligible items than 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 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, you cannot require proof of purchase or an explanation of benefits for any expenses listed in IRS Publication 502 with a stipend, as doing so would change your stipend into a more formal reimbursement benefit and subject it to additional requirements.
But, there are some exceptions to the substantiation rules. For example, you can require substantiation of direct primary care network or healthcare sharing membership fees.
Health stipends are also taxable for employers and employees, 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.
A stipend also doesn’t satisfy the Affordable Care Act’s employer mandate for organizations with 50 or more full-time equivalent employees (FTEs), while an ICHRA can.
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 participate in an HRA. It also benefits employees who receive advance premium tax credits (APTCs) and remote workers who live in multiple states with varying health insurance plan options.
You can always offer a health or wellness stipend alongside an HRA to cover additional expenses.
Conclusion
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 top talent looking for a flexible employee benefits package.
If you’re ready to offer your employees an HRA, PeopleKeep can help! Our HRA administration software makes setting up a health benefit in minutes quick and easy.
This article was originally published on February 10, 2020. It was last updated on December 15, 2023.
