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 an 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 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. To view a partial list of qualified medical expenses, click here.
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.