Who can administer an HRA, or health reimbursement arrangement? The short answer is anyone, though it’s important that the administrator understands what the role entails.
HRAs provide employers with a high quality, affordable health benefits solution. An HRA requires an administrator who reviews expenses and approves reimbursements.
This article examines HRA rules and regulations as well as defines who can administer the HRA in a compliant way.
To understand who can administer an HRA, it is first important to understand the basic rules of HRAs.
HRAs are authorized under Section 105 of the Internal Revenue Code, as well as through the Small Business Healthcare Relief Act. They are a type of self-funded, tax-favored plan that may be offered either in conjunction with a group health plan, or as a stand-alone plan to reimburse qualified out-of-pocket medical expenses and insurance expenses.
With a qualified small employer HRA (QSEHRA) or an individual coverage HRA (ICHRA), an organization reimburses employees for qualified medical expenses and individual health insurance premiums instead of offering a group health insurance policy.
To receive the tax benefits of an HRA, and to be compliant with various regulations (outlined further below), the Internal Revenue Service (IRS) has defined the rules and guidelines for an HRA in IRS Notice 2002-45.
Under these rules:
- An HRA is paid for solely by the employer and cannot be funded through employee salary deduction (in other words, it is not a cafeteria plan).
- An HRA may only reimburse employees during their effective dates in the HRA plan.
- An HRA can reimburse for eligible medical expenses and health insurance premium amounts, as defined in IRC Section 213(d)(1)(D).
- Each eligible medical expense must be substantiated.
- Reimbursements are generally excludable from the employee's gross income under Internal Revenue Code Sections 106 and 105 (that is, they are free from income tax as long as the employee has minimum essential coverage). They are also free from payroll taxes for both the employer and employee.
What do employers need to administer an HRA?
For an employer to administer an HRA, they need to have legal HRA Plan documents in place. These documents describe the terms and conditions related to the operation and administration of the HRA. Since an HRA is subject to ERISA, the document must be provided in writing. If an HRA exists without a written HRA Plan document, the organization is out of compliance. In addition to the HRA Plan document, an organization needs to make sure it has certain safeguards in place to stay compliant with the IRS, ERISA, HIPAA, and the Affordable Care Act (ACA).
Types of HRA administrators
Because of these compliance reasons, and for ease of use and time savings, most organizations use a third party for HRA administration services. Organizations have two main options for compliant HRA administration: a traditional third-party administrator (TPA) or an HRA software provider.
- An HRA administration software provider helps organizations: set up the HRA, create and distribute HRA plans electronically, provide tracking of HRA funds, review claims for reimbursement, keep medical receipts on file electronically, and notify the employer through the software when to reimburse employees via payroll. HRA software does not require pre-funding of HRA allowances and is not a fiduciary. The organizations appoints someone to review and approve reimbursements that have been verified as eligible by the software provider. These tasks can be performed in just minutes per month, so it’s common for organizations to assign office managers, accounting staff, or even their insurance agent or CPA to perform these tasks.
- A traditional TPA will help an organization set up the HRA, create and distribute HRA Plan documents, manage all HRA funds, review claims for reimbursement, keep medical receipts on file, and issue reimbursements to employees. Traditional TPAs require pre-funding of the HRA allowances into accounts.
The other way employers occasionally administer an HRA is by self-administration.
- Self-administered HRAs: Technically, an organization can self-administer its HRA, but failure to comply with the minimum HRA federal administration requirements is common without utilizing proper HRA software or a TPA. Organizations that self-administer are frequently out of compliance with HRA, ERISA, HIPAA, COBRA, and ACA regulations, and they can face costly fines. If an organization puts into place all of the safeguards needed for compliance, the administrative cost likely outweighs the benefits of the HRA.
HRA administration and compliance
Following are the HRA compliance requirements discussed above:
Tax savings and IRS compliance
The IRS requires that a formal HRA be established in order for reimbursements to be tax-free for the employer and employees. These documents describe the duties the Plan administrator will perform. Employers must also present employees with a Summary of Benefits & Coverage document.
See the following articles for reporting requirements:
The federal government has guidelines for employers who want to contribute to employee's IRS-qualified medical expenses:
- HIPAA (Medical Privacy): Employees’ medical information needs to be kept HIPAA-protected, and all medical documentation must be stored in compliance with HIPAA for 7 years, as required by the IRS for audit purposes. Employers should never see employees’ medical information, or even the type of medical expenses, to stay HIPAA-compliant and nondiscriminatory.
- ERISA: Under ERISA, employers are not allowed to “endorse” a specific individual health insurance plan. When offering an HRA, the employer should not know the details of individual health insurance plans purchased by employees, or even if they are seeking reimbursement for a health insurance premium (only that it is a qualified medical expense allowed by the HRA).
- COBRA. Organizations who employ 20 or more employees must give eligible employees a chance to elect COBRA coverage when they are terminated from an HRA benefit.
- ACA regulations. These regulations provide guidance as to what plans satisfy the employer mandate for providing coverage and what constitutes minimum essential coverage.
Organizations can assign anyone they want to administer an HRA. However, it’s important for that person to be well-versed in HRA regulations and compliance. This is why most organizations choose to use an HRA administration software provider like PeopleKeep or a TPA to perform these duties.
Interested in learning more about our software? Watch an on-demand demo
This post was created on October 1, 2018. It was last updated on October 20, 2020.