What is a Health Reimbursement Arrangement (HRA)?
HRAs have been referred to by many names over the years such as personal savings accounts, personal care accounts, defined contribution plans, or consumer-driven health care plans.
The confusion ended in 2002, when the IRS finally issued guidelines in Notice 2002-45 and Revenue Ruling 2002-41 for employer-provided medical reimbursement accounts and called it the Health Reimbursement Arrangement, or HRA.
Health Reimbursement Arrangements are funded with employer dollars to pay expenses not covered by another health plan. An employer can opt for its HRA to pay some or all of the health expenses allowed by the IRS. For example, an HRA could pay all eligible medical expenses, including premiums for health and long-term care insurance; or the HRA could be limited to cover only dental or vision expenses. Although an HRA can have an option to carry forward unused funds to the future or for retirement, an employee cannot take their HRA funds to a new employer.
How Employers Utilize a Health Reimbursement Arrangement.
Expenses not reimbursed by health insurance are one way employer groups are utilizing HRAs. With an HRA, the employer funds an account from which the employee is reimbursed for qualified medical expenses, such as co-pays, deductibles, vision care, prescriptions, long-term care, medical insurance, chiropractic care, and most dental expenses. Over-the-counter drugs that are medically necessary may also be reimbursed through an HRA. Reimbursements from the HRA are not taxed to the employee and are deductible by the employer.
The most common use of an HRA is in combination with a High Deductible Health Insurance Plan. Employers purchase a lesser Health Insurance Plan then supplement the employee with an account they can utilize to offset the high out of pocket costs that they will incur. HRAs can enhance a company’s benefit package while helping to contain costs and boost employee morale. The employer benefits from reduced insurance costs, but the effect to the employee is cushioned with the addition of the HRA account.
HRA Plan Design Flexibility!
HRAs provide employers with a lot of flexibility in Plan design. Limits can be set on types of service reimbursed by an HRA. Amounts contributed to an HRA can be in a lump sum or in increments throughout the year. This is in contrast to a Section 125 Medical FSA where the employer can be liable for the full amount on the first day of the plan. You can also choose to carry over unused HRA funds to the next plan year, or have all or a portion of the unused HRA funds forfeited at the end of the year.
HRA accounts can pay the same expenses as Section 125 Flexible Spending Account, however, unlike an FSA only employers can contribute to the HRA.
In contrast to the “use-it-or-lose-it” rule of Cafeteria Plans, the employee gets to carry forward any unused HRA account funds. Depending on the HRA design options elected by the employer, their employees may request reimbursement for medical expenses as the time services are rendered, accumulate them for reimbursement in the future, or save funds in the HRA for retiree health benefits.
Who Can Establish an HRA Plan?
Sol Proprietors, Partnerships, Regular Corporations, S-Corporations, Limited Liability Companies (LLCs), Professional Corporations, and 501(c) 3 not for profits can establish an HRA Plan.
Individuals that can not personally participate in an HRA include Sole Proprietors, Partners, Members of the LLC, or individuals owning more that 2% of the S-Corporation. Although these specific owners can not personally participate, they can still sponsor an HRA and benefit from the write-off.
Benefits of an Health Reimbursement Arrangement (HRA)
HRA Advantages to Employers and Employees.
Control. HRAs allow employers to retain control of funds and decide what type of expenses will be reimbursed and also whether the HRA funds will carry over from year to year. By adding a higher-deductible insurance plan with your HRA plan employers can cut the cost of providing healthcare benefits to their employees.
HRA Financial Flexibility. HRAs don’t require pre-funding; you may simply reimburse plan members for eligible expenses as they occur. As a result, employers can free up assets for other uses.
Savings with an HRA. Reimbursements through an HRA are tax deductible for the employer and tax exempt for the employees. That means everyone experiences a tax advantage when you select an HRA. Employers and employees also enjoy the lower premiums that go with a high-deductible health plan.
Choice with HRAs. There are on restrictions on the type of health plan that can be paired with an HRA, so employers are free to choose the perfect plan for the employees. Also, employees get to decide where and when to spend the HRA funds. They are free to choose healthcare providers and shop for better prices.
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