This section outlines Health Reimbursement Account (HRA) implementation strategies.
There are six steps to consider as you, and employer, implement a Health Reimbursement Account (HRA):
Because of these compliance reasons, and for ease of use and time savings, most businesses use a third party to administer the HRA. Businesses have three main options for HRA administration: a traditional third party administrator ("TPA"), an HRA Software provider, or self-administration.
Administration Software for a Health Reimbursement Account
Health Reimbursement Account Administration Software provides companies with:
This section outlines 13 features to look for with Health Reimbursement Account (HRA) Administration Software.
(1) Automated compliance and software updates
Your administration tool should keep your benefit plan up to date and compliant with applicable rules and regulations by including, at minimum, the following:
- A legal plan document and SPD
- Collection and storage of electronic enrollment signatures
- Verification and compliance with HIPAA privacy laws
- ERISA compliance
- Proof of minimum essential coverage
- Internal and external documentation appeal process
- Dependent coverage for adult children up to age 26
- Notice automation as required
(2) Online administrative access
Your company should be able to manage the entire HRA online. The cloud-based software should allow your plan administrator to easily add and remove employees, modify plan rules, record reimbursements, and access reporting tools.
(3) Real-time accounting
Your administration tool should automatically keep track of monthly allowances, verified expenses, reimbursements, and balances. It should provide real-time access to accounting details, including total allowances, total reimbursements, and outstanding liability to the company in aggregate and on an employee-by-employee basis.
(4) Streamlined employee enrollment
Your administration tool should allow for easy employee management. It should automatically email a welcome letter and other plan administration information. For terminated employees, the system should automatically track a run-out period and notify the employee they’ve been removed.
(5) Employee reimbursement and record-keeping
Your administration tool should allow the plan administrator to record reimbursements individually or on a periodic batch basis. Reimbursements are paid via check or payroll. The system should leave a well-organized and permanently available audit trail. Additionally, it should send email notifications to employees when their reimbursement request is approved, and again confirming when (and how) it will be reimbursed.
(6) Automated renewals
One of the benefits of an HRA is eliminating the labor-intensive annual renewal process of traditional group policies. Your administration tool should allow you to automatically renew online. There should be no paperwork required and no renewal fees. The process should be quick and easy for the plan administrator, and it should not affect employees.
(7) Online access and balance tracking for employees
Your administration tool should provide each employee with secure online access to view their allowances and expenses and to request reimbursements. It should also provide access to the required plan documents.
(8) Employee welcome letters
When employees are added to the HRA, your administration tool should automatically customize and distribute employee welcome letters. These welcome letters instruct employees on how to use the HRA.
(9) Access to a health benefits advisor
Your administration tool should provide employees with online access to individual health insurance resources. You should have the option of directing employees to a health insurance broker or a website for health insurance information. The software should not restrict employees from purchasing individual coverage from any source, whether through a broker, through the health insurance Marketplace, or directly from an insurance company. Look for an administration tool that helps employees shop for and purchase individual health insurance policies, ideally directing employees to a designated broker or online comparison site for quotes.
(10) HSA compatibility
Your administration tool should be compatible with health savings accounts (HSAs), allowing employees to contribute to an HSA while participating in your HRA. Even better, your administration tool should have relationships with top HSA providers to help employees open an HSA.
(11) Easy reimbursement requests
Your administration tool should allow employees to request reimbursement online and immediately acknowledge their request and provide a link to monitor request status. The software should have all documentation permanently available for convenient employee access.
(12) Fast reimbursement request review service
Your administration tool should provide an independent service to review employee reimbursement requests and provide a recommendation to the plan administrator within one business day. Employees should be able to inquire about their request online, through email, or by telephone. Employees receive an email with information on perfecting a reimbursement request if the submitted documents do not match the request.
(13) Reimbursement of large expenses over time
Your administration tool should make it easy for employees to track reimbursement requests and balances. If an employee's reimbursement request exceeds his or her balance, the software should not reject it. Rather, employees should continue to receive partial reimbursements until the entire expense has been reimbursed.
Frequently Asked Questions about Health Reimbursement Accounts
This section answers frequently asked questions (FAQs) on Health Reimbursement Accounts.
What is a Health Reimbursement Account?
A Health Reimbursement Account (HRA) is an IRS-approved, employer-funded, tax-advantaged plan that reimburses employees for eligible out-of-pocket medical expenses, including individual health insurance premiums.
HRAs are one of several programs authorized by the Internal Revenue Service (IRS) that give individuals tax advantages to offset health care costs.
What is the difference between a Health Reimbursement Account and a Health Savings Account (HSA) or Flexible Spending Account (FSA)?
An HRA, HSA, and FSA are all IRS-approved plans where distributions are used to pay for qualified medical expenses on a pre-tax basis. However, there are some key differences:
HRA: An HRA is a notional account funded solely by the employer. Employees may not contribute. Contributions are not included in employees' income. Employers pay only after their employees incur eligible medical expenses.
HSA: An HSA is a financial account and can be funded by the employer and/or the employee, as well as any other person (such as a family member). Contributions, other than employer contributions, are deductible on the eligible individual’s tax return whether or not the individual itemizes deductions. Employer contributions are not included in income.
FSA: An FSA can be funded by the employer and/or the employee, though usually it is funded primarily by the employee.
For a detailed comparison chart, see this section on Medical Reimbursement Plans.
Why would an employer offer a Health Reimbursement Account?
An HRA allows companies to offer flexible benefits, providing a way for a company to offer more affordable health insurance or as an alternative to group health insurance. HRAs offer certain advantages:
Recruiting & Retention
Read more: Health Reimbursement Account Pros and Cons
How many Health Reimbursement Accounts have been established?
While the total number of HRAs is not available as a single number, according to the Employee Benefit Research Institute the total number of HRAs and HSAs combined in 2012 was 11.6 million, up from 1.3 million in 2006. Assets in HRAs and HSAs in 2012 were $17 billion, up from $873 million in 2006.
How do Health Reimbursement Accounts work?
Employers choose the amount of HRA allowances to provide to employees (monthly or annual allowances). These funds are notional, and available to reimburse individuals for eligible health care expenses. When the employer sets up the HRA, they decide what categories of medical expenses to reimburse and other rules of the plan. Once employees incur an eligible medical expense, they submit a reimbursement request and, once approved, are reimbursed by the employer tax-free.
What are critical underwriting or participation requirements?
With an HRA, there is no underwriting and no participation requirements. HRA administration fees are typically based on the size of the company and plan participation.
The HRA plan must meet basic IRC Section 105 non-discrimination requirements to obtain favorable tax treatment. Benefits may be tiered according to single vs. family coverage, or based on bona-fide job criteria such as years of service, location, job description, or employee status (ex: active vs. retired).
Are there minimum and maximum amounts of funding for Health Reimbursement Accounts?
Currently there are no annual minimum or maximum limits on HRA plan funding.
What medical expenses can Health Reimbursement Accounts funds be used for?
IRC Section 213(d) sets which medical expenses are reimbursable through an HRA. Within this list, employers can restrict categories of expenses.
Can employees have an HRA and an HSA or FSA?
Yes. All three programs can exist alongside one another, but employers must be careful about how they work together. For example, with both an HSA and FSA there are special ordering ("coordination") rules to consider.
Can an Owner Participate in Health Reimbursement Accounts?
Yes. However, whether or not owners can receive HRA reimbursements 100% tax free depends on how the company files, and the owner's status.
C-Corporation Owners: C-Corp owners may participate in an HRA and receive all HRA reimbursements 100% tax-free.
Sole Proprietors, Partners, or S-Corp shareholders that own >2% of the company's shares: These Non-C-Corp owners can use the HRA platform to reimburse and track medical expenses. However, HRA reimbursements must be reported on the owners'/partners' wages (on their W-2 and 1040 forms) and are subject to federal income taxes.
Can 1099 Contractors Participate in Health Reimbursement Accounts?
Technically, the answer is no. However, many businesses use HRA Software to offer health benefits to 1099 contractors. The primary difference is that, unlike W-2 employees, 1099 contractors must report all HRA reimbursements as income on their personal tax return.
Do you have additional questions about Health Reimbursement Accounts? Contact us. We'd be happy to help.
Additional Reading on Health Reimbursement Accounts
HRAs in 2015 - What All Employers Need to Know
In the past, Health Reimbursement Accounts (HRAs) were a popular vehicle used by small businesses to reimburse employees tax-free for individual health insurance premiums and out-of-pocket medical expenses. However, health reform brought sweeping changes to the health insurance industry, including how employers can use HRAs. >> Read more.
How to Make a Stand Alone HRA Work for Your Business
Stand-alone Health Reimbursement Arrangements (HRAs) can be somewhat confusing. And if you own a small business, you might be wondering what they are and how they work. This article breaks down Stand-alone HRAs, more specifically one-person Stand-alone HRAs, to provide a thorough understanding of how Stand-alone HRAs work in 2015 and beyond. >> Read more.
10 HRA FAQs - Health Reimbursement Account Rules
This article provides ten frequently asked questions on Health Reimbursement Accounts. >> Read more.
Who Can Administer a Health Reimbursement Account (HRA)?
Health Reimbursement Accounts are growing in popularity because they allow businesses to provide health benefits at an affordable cost. A common question is "who can administer the Health Reimbursement Account?" This article examines the rules of HRAs and who can administer the HRA in a compliant way. >> Read more.
Health Reimbursement Account (HRA) Eligibility FAQs
This article answers frequently asked questions (FAQs) about HRA Eligibility. >> Read more.