Introduction to an HRA
HRA plans, also known as Health Reimbursement Accounts, consist of funds set aside by employers to reimburse employees for qualified medical expenses, just as an insurance plan will reimburse covered individuals for the cost of services incurred.
Overview of How an HRA Plan Works
An HRA is a tax-advantaged benefit that allows both employees and employers to save on the cost of healthcare.
HRA plans are employer-funded medical reimbursement plans. The employer sets aside a specific amount of pre-tax dollars for employees to pay for health care expenses on an annual basis. Based on the plan design, HRAs can generate significant savings in overall health benefits.
HRAs may be designed in many fashions to suit the specific needs of employer and employees alike. It is one of the most flexible types of employee benefits plans, making it very attractive to most employers.
How an HRA Benefits the Employer
HRAs are most commonly offered in conjunction with a high deductible health plan (HDHP). As a rule, moving to a HDHP will result in reduced premium costs, which creates real savings on healthcare costs for the employer. HRA contributions may then be funded using the savings gained from the lower premium costs. By funding an HRA, the employer effectively bridges the gap between the higher deductible and the expenditure amount at which the insurance coverage “kicks in” for their employees.
Most importantly, all employer contributions to the plan are 100 percent tax deductible to the employer, and tax-free to the employee.
Employers may establish what expenses the HRA funds may be used for; from as comprehensive as all health-related eligible expenses to as limited as emergency room expenses only. Because they are very flexible, HRA plans enable employers to control costs of providing healthcare benefits while providing a valuable employee benefit.
With an HRA, employee healthcare expenditures are visible and clear to employer and employee alike, thereby fostering a greater understanding of the costs of healthcare. In addition, employees who can monitor and control their healthcare costs become smarter healthcare consumers.
Studies show that only 20-50 percent of employees actually use their healthcare coverage, meaning employers often pay health insurance premiums for employees who are not utilizing the coverage. An HRA allows employers to determine the best type of coverage for their employees based on the demographics of their employee group.
How an HRA Benefits the Employee
Enrolling in an HRA provides two major advantages to employees: (1) a reduced health insurance premium resulting from the HDHP, and (2) availability of employer-sponsored funds to pay for medical expenses incurred prior to the point at which the insurance deductible is met.
Depending on the plan design, expenses that may be reimbursed from the HRA include deductibles, co-payments, co-insurance, prescription medications, vision expenses, dental expenses, and other out-of-pocket health-related expenses.
HRA funds are contributed to employees on a pre-tax basis; therefore, the funds are not taxable to the employee. As such, employees need not claim an income tax deduction for an expense that has been reimbursed under the HRA.
HRA Plan Designs
HRA plans are very flexible. An employer can design a custom plan to meet the unique needs of the company as well as the employees. Typical plans include:
Deductible, Co-pay, and Co-insurance.
All medical expenses that are applicable to the health plan’s deductible, a co-pay amount, or a co-insurance amount qualify for reimbursement. Qualified expenses are those incurred by the employee or the employee’s family. Explanation of benefits (EOB) statement (provided by the employee’s health insurance provider) showing evidence that the expense is applicable to the insurance deductible is typically required for substantiation of requests for reimbursement.
All Uninsured Medical Expenses.
All out-of-pocket medical expenses (uninsured costs) are eligible. This includes deductibles, co-pays, co-insurance, dental, vision, prescription, and other out-of-pocket medical expenses. These expenses may be incurred by the employee or the employee’s family. An EOB statement, copy of a receipt, or copy of a bill identifying the date of service, amount of service, and the name of the service provider are typically used to substantiate requests for reimbursement.
Specific Expenses Only.
An HRA plan can be designed to only cover the out-of-pocket cost for prescription medication, dental, vision, and/or other specified expenses. A copy of a receipt or bill with the date and cost of service and name of the service provider are generally required when requesting reimbursement.
HRA Eligibility Rules
HRAs must be set up by an employer on behalf of employees. In addition, the following eligibility rules apply:
- Self-employed individuals are not eligible for an HRA.
- The HRA must be funded by employer contributions only; it cannot involve employee contributions either on a salary-reduction basis or an after-tax basis.
- The plan may provide benefits for substantiated medical expenses only.
Control of Funds
Employers decide how much money to put in HRAs, and employees can withdraw HRA funds for expenses allowed under the employer’s HRA plan documents. The Internal Revenue Service (IRS) allows employers to establish HRAs with unfunded credits rather than with hard-dollar amounts. This arrangement is similar to a line of credit against which employee expenses are paid with employer funds when and if they occur.
Employers can determine whether employees have access to the entire annual HRA contribution at any time during the year or whether they can access only a portion of the funds at any given time.
HRA Contribution Limits
There is no limit on the amount of money an employer may contribute to an HRA.
Federal Tax Benefits
Employer contributions to an HRA are not treated as taxable income to the employee, and employees can spend the funds tax free. In addition, employers are entitled to deduct the amount of their contribution. If they fund the account with hard dollars, they can take an immediate deduction. However, if the account is funded on a “notional” basis (such as a line of credit), the employer can take the deduction only when the amounts are actually paid out.
HRAs and Health Insurance Plans
Although an HRA plan is usually established with a high deductible health plan (HDHP) for employees, it can be paired with any type of health plan. It can also be used as a stand-alone account. In addition, HRAs can be offered in conjunction with a health flexible spending arrangement (HFSA). Employers decide what other types of products to offer with the HRA.
Types of Expenses Payable – What Can HRA Funds be Used For?
HRA funds can be used for any item qualifying as a medical expense under the Internal Revenue Code (except long-term care services). However, it is up to employers to determine whether employees can use HRAs for any of these items or only for medical expenses covered under the employer’s health benefit plan.
If the employer offers an HRA in conjunction with a HDHP, the employer can decide whether to cover preventive care without requiring employees to meet the HDHP deductible.
Can You Pay Insurance Premiums with an HRA?
According to the IRS, HRA funds can be used to pay health insurance premiums, long-term care coverage, and qualified medical expenses not covered under another health plan, although it is up to employers to decide whether employees can use the funds for these purposes.
Can HRAs Be Used For Expenses Incurred by a Spouse or Dependent?
The IRS gives employers the option of allowing employees use an HRA to pay their spouses’ and dependents’ qualifying expenses.
Leftover Funds: Do HRA Funds Roll Over? Can I Cash Out My HRA?
Amounts remaining in the account at the end of the coverage period may be rolled over and used in a subsequent coverage period to pay for allowable medical expenses. Employers may not refund any part of an HRA balance to employees.
It is permissible to continue the HRA subsequent to the termination of employment, retirement, or death of the employee and to use the amounts credited under the HRA for the following:
Payment of medical expenses incurred by the former employee or the employee’s spouse or dependents subsequent to termination of employment, retirement, or death.
- Payment of Consolidated Omnibus Budget Reconciliation Act (COBRA) premiums for the employee or the employee’s spouse or dependents.
- Payment of medical insurance premiums for the employee or the employee’s spouse or dependents.
Questions? Need Assistance? HCI’s HRA Consultants Can Help
Healthcare Consultants, Inc. can assist your company in setting up an HRA plan as part of your group health insurance benefits in Texas. If you have questions, we invite you to contact us now. One of our experienced HRA consultants will be happy to help.