Health Reimbursement Arrangement

What Is an HRA?

Authorized under Section 105 of the Internal Revenue Code, a Health Reimbursement Arrangement (HRA), also known as a Health Reimbursement Account, is a type of self-funded, tax-favored program that may be offered in conjunction with a health plan.

Although HRAs can be established in conjunction with any type of health plan, most often they are paired with a High Deductible Health Plan (HDHP). This pairing allows an employer to fund employees' individual Health Reimbursement Accounts using premium savings realized by switching from a low deductible health plan to a more economical high deductible plan.

Any type of employer of any size can offer a HRA to its employees. However, HRAs are subject to non-discrimination testing under Section 105(h) of the Internal Revenue Code. These rules prohibit discrimination in favor of highly compensated individuals as to eligibility to participate and the benefits provided by the HRA. In general, 2% or more owners of an S-Corporation, partners in a partnership or LLC and sole proprietors are not eligible to participate in their company's plan on a tax-favored basis.

These are the general rules relating to the funding of an HRA:

HRAs must be funded solely by the employer. The employer may not fund the HRA through a salary reduction election.
There are no specific dollar limitations on the amount an employer may credit to an HRA.
Employers may fund HRAs with annual lump sums or on a per-pay-period basis.
Employers may restrict reimbursements to current account balances.
Employers can allow balances or a portion of the balance to be carried over from year to year.
Beginning in 2014 HRAs should be integrated with a General Health Plan (GHP).

Although — if paired with a health plan — employees may be asked to contribute to the cost of their health plan premium, no portion of the HRA can be funded by the employee. The HRA may only be funded by the employer.

Funds must be used for qualified medical expenses permitted under Section 213(d) of the Internal Revenue Code, although the employer can establish more restrictive limits for the use of HRA funds. View a partial list of qualified medical expenses.

In order for employers to implement an HRA they must have a written plan document in place. In addition, there is a requirement to provide each employee with a Summary Plan Description (SPD). An SPD is a summary of the Plan Document. Considered a self-insured health plan, the employer must annually pass non-discrimination testing to remain in compliance with Plan requirements. As a self-insured Health Plan both COBRA and HIPAA apply. In addition as part of PPACA, companies with an HRA plan year ending after September 30th, 2012 and before September 30, 2019 will be responsible to pay PCORI fees annually, and PCORI between plan years ending between 2012 & 2019 PCORI fees must be reported and paid annually.

Employers qualify for preferential tax treatment of funds contributed to a Health Reimbursement Account in the same way that they qualify for tax advantages by funding an insurance plan. In short an employer can deduct the cost of both an insurance plan and a Health Reimbursement Account as a business expense. And, as is true of qualified Health Savings Accounts and Flexible Spending Accounts, reimbursement of medical care expenses of an employee and the employee’s spouse and dependents are generally excludable from the employee’s gross income.

Why Is an HRA Good For Business?

Pairing a high deductible health plan with an HRA has a number of advantages for an employer, including the following:

You reduce your health insurance premium when you replace your low-deductible health plan with a high-deductible plan.
If your employees incur fewer medical expenses than the amount you deposit in their respective HRA, your savings can be even greater.
You have an opportunity to reduce costs at renewal, since employees will have an incentive to make more informed decisions about their health care.
Reimbursements are tax-deductible.
You do not need to pre-fund your HRA account. Reimbursements may be made from your business’ general account when medical expenses are incurred, which allows for greater control of cash flow.
If an employee's employment is terminated, you can retain ownership of the funds.

You have a great amount of flexibility in designing your HRA. You can specify the terms of your HRA, including the following:

The maximum annual reimbursement.
Who pays deductible expenses first, your employees or you.
Whether unused funds can be rolled over to the next year, and if so, the amount that can be rolled over.
What expenses will be covered by the HRA. For example, you may elect to allow all IRS qualified medical expenses to be paid through the HRA, or you may limit or restrict what expenses may be reimbursed.
And if you wanted to encourage employees to seek preventive care, you might stipulate that a portion of the HRA is forfeited if not used for

Pairing a high deductible health plan with an HRA has a number of advantages for the employee, including the following:

Employees are protected against catastrophic medical costs.
HRAs are employer-funded and depending upon the plan design, the employer may pay for benefits first.
Employees receive reimbursements tax-free.
Employees become more involved in their own health care and make more informed spending decisions.

Employees can save money when you move to a higher deductible plan with an HRA. Here's how:

If employees currently pay for a portion of their premium, you can reduce the amount they pay.
If a catastrophic event does occur, an employee’s portion of total claim cost could be less with an HRA plan.
Employees can build up a significant account balance to be used for future medical needs if the plan design permits rollovers.

FAQs

Can an owner participate in a HRA?

Owners establishing an HRA for their employees should always include themselves and their spouses in the HRA platform, although in some cases such Owners may not receive the same amount of tax benefits as non-owner employees.

Current or former employees may participate in a HRA and receive reimbursements 100% tax-free. Employees who are "Owners" (e.g. sole proprietors, partners, or S-Corp shareholders that own >2% of the company's shares) may use the HRA platform but may not receive the same amount of tax benefits as non-owners as explained herein.

S-Corp Owners may receive reimbursement from their companies for medical expenses, and they may use the HRA platform to receive and track these reimbursements. However, reimbursements made to Owners must be reported on the owners'/partners' wages (on their W-2 and 1040 forms) subject to federal income tax withholding. These reimbursements are exempt from Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes, similar to profits passed through to the owner. Further, the cost of the reimbursements is a deductible expense to the business, reducing the taxable income of the business and, thus, reducing the taxable income of the owners/partners (because these are flow-through tax entities).

Note that sole proprietors and other self-employed individuals receive an above-the-line tax deduction for personal health insurance premiums. IRS Notice 2008-1 clarified that S-Corp owners may only take the self-employed health insurance premium tax deduction (on Form 1040) if the S-Corp pays for or reimburses the owner for the premiums.

Owners of C-Corporations may participate in an HRA. If the company is an LLC, owner participation varies based on the way the LLC files taxes (i.e. if they file taxes as a partnership, S-Corp, or C-corp).

The family members for C-Corp owners may receive reimbursement from their companies for medical expenses, and they may use the HRA platform to receive and track these reimbursements. However, reimbursements made to C-Corp Owners must be reported on the owners'/partners' wages (on their W-2 and 1040 forms) subject to federal income tax withholding. These reimbursements are exempt from Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes, similar to profits passed through to the owner. Further, the cost of the reimbursements is a deductible expense to the business, reducing the taxable income of the business and, thus, reducing the taxable income of the owners/partners (because these are flow-through tax entities).

Can family members of an S-Corp owner participate in a HRA?

Title 26 of IRS Code states that spouses, children, grandchildren, and parents are all considered owners when one person has greater than 2% ownership of an S-Corp.

What is a Health Reimbursement Arrangement?

Authorized under Section 105 of the Internal Revenue Code, a Health Reimbursement Arrangement (HRA), also known as a Health Reimbursement Account, is a type of employer funded program that may be offered either in conjunction with a health plan, or as a standalone plan to reimburse qualified out-of-pocket medical expenses.

HRA funds are then available to reimburse some portions of employers out of pocket deductible expenses and in some cases other eligible medical expenses.

Who can have an HRA?

Any type of an employer of any size can offer a HRA to its employees. If the HRA is “Linked” to a High Deductible Health Plan then only participants of the HDHP are eligible to participate in the HRA. If the HRA is “Non-Linked” then generally, all benefit eligible employees are eligible.

Who may fund an HRA?

HRAs may only be funded by the employer.
There are no specific dollar limitations on the amount an employer may credit to an HRA.
Employers may fund HRAs with an annual lump sum or on a monthly or per pay period basis.
Employers may restrict reimbursements to current account balances.

How may funds be used?

Funds must be used for qualified medical expenses permitted under Section 213(d) of the Internal Revenue Code, although the employer may establish additional restrictions for the use of HRA funds.

How do I access the funds in my HRA?

Submit a completed HRA reimbursement request form along with a copy of an explanation of benefits form (EOB), statement, bill or receipt showing the type of service, date of service and amount of service provided.

Can funds be carried over from year to year?

In their most recent guidance, the IRS permits unused funds to be carried over from year to year. However, carryovers are not required, and many employers elect not to allow them. Health Reimbursement Accounts generally remain with the originating employer and do not follow an employee to new employment, although balances may be used after termination of employment at the discretion of the employer.

What is the tax treatment of HRA Reimbursements?

As is true of qualified Health Savings Accounts and Flexible Spending Accounts, HRA reimbursement of medical care expenses of an employee and the employee's spouse and dependents are generally excludable from the employee's gross income.

Can an HRA be offered in conjunction with a Flexible Spending Account?

If an HRA is provided in addition to a Flexible Spending Account (FSA) special rules apply to the ordering of payments. Absent a specific ordering rule in the HRA document, the HRA funds must be used first if the FSA covers a medical expense that also is covered by the HRA.

Employees cannot be reimbursed for the same medical expense by both an HRA and an FSA.

Employers: Benefit Offering or Plan