A health reimbursement arrangement (HRA) is a way for employers to reimburse their employees for health expenses. The arrangement benefits all parties, because employers can claim a tax deduction for reimbursements, while employees can use these employer-funded accounts to pay for medical costs tax free.
Businesses use HRAs instead of group health insurance or in addition to it, depending on their situation. But with all the acronyms, benefits options, and health care choices available today, what does it all really mean?
In this article, learn how HRAs began, how they work, which people they benefit, and what types of HRAs are available.
If you want the at-a-glance guide, check out this infographic we put together!
History of Health Reimbursement Arrangements in America
To understand where HRAs originated, we get to look back all the way to the Civil War when workers were supported by funds set up by their employers, unions, and community organizations. Workers made weekly contributions to a fund that members could use when they became too sick or injured to work. By the 1900s, the majority of states started selling insurance coverage to employers for workers’ compensation, which brought down employers’ overall expenses.
During the Great Depression, doctors began satisfying payment and services by offering forms of health insurance. World War II, the labor movement, and the tax code all encouraged employer coverage. During the 1960s, insurers remained competitive by offering lower premiums to big employers. Alternatively, by the 1980s, self-insured employer plans began gaining popularity. By the 1990s, cost reduction and an emphasis on employee control gave employers incentive to adapt plans similar to HRAs, since HRAs as we know them today weren’t completely defined yet.
In 2002, the IRS did define HRA criteria under Notice 2002-45 and Revenue Ruling 2002-41. The agency stated that HRAs were employer-provided medical care expense reimbursement plans, in which reimbursements for medical care expenses made from the plan are excludable from the employee’s gross income. The IRS definition also explained HRAs could only be used to reimburse active or former employees, be funded by the employer, and be used for eligible medical care.
HRA Options and Types
Under the 2010 Affordable Care Act (ACA), there were three possible types of HRAs: the integrated coverage (standard) HRA for employers that already offered group health insurance, the retiree HRA for retired employees to pay for medical costs, and a dental/vision coverage HRA. Then, in 2017, the government introduced the Qualified Small Employer HRA (QSEHRA) for employers with less than 20 full-time (or full-time equivalent) employees, allowing them to offer the HRA instead of group coverage.
Most recently, in June 2019, the government announced two new types of HRAs available for 2020: The Individual Coverage HRA (ICHRA) and the Excepted Benefits HRA (EBHRA). The ICHRA allowed all employers, no matter the size, to reimburse employees for health care expenses. For ICHRA participation, an employee is also required to have individual health insurance. Employers, however, can’t offer ICHRA and group insurance to the same employee.
The EBHRA, on the other hand, was intended to cover non-primary medical expenses like dental care, vision care, long-term care, and COBRA coverage premiums for employers that offer group health insurance, but want to control costs and increase options for employees.
All these updates to HRAs are part of a movement to put consumers in control of their health care and give employees and employers more ways to save money. Just as employer and union funding started to pave the way to help workers and protect businesses back in the Civil War era, HRAs have continued evolving to do the same—just under a range of different names.
How HRAs work
How does a health reimbursement arrangement work? Let’s look at a typical situation an employer could set up:
1. The employer contributes tax-free funds to the employee’s account.
Tax free is the key here. The amount is put right into an account, so the employee knows exactly how much is in there, how much is left, and when more will be put into it again.
2. It covers funds for the employee and their family’s qualified health care expenses, which could include deductibles, copays, prescriptions, and more.
There are thousands of eligible items and services that are available, including ones you don’t usually think of, like flu shots, transportation to medical care, and chiropractor visits.
3. After incurring a qualified expense, the employee submits proof of the payment and the employer approves it and reimburses the employee.
Paper receipts, digital receipts, pictures of paper receipts, paying through a benefits app—there are so many ways to keep records. The employee simply picks one that’s convenient to save evidence of the cost for reimbursement. They validate the eligible expense by providing proof of purchase/service, and like magic…the cost is reimbursed! In addition, employers can offer payment cards to cover items and services up front.
Why Employers and Employees Like HRAs
Employers choose HRAs because they are a simple, straightforward, cost-conscious option. Implementing an HRA gives employers control over spending because they know exactly how much they are setting aside for each employee at the start of the plan year, rather than finding out how much employees spend on their health care in real time.
Employees like HRAs because they provide relief for ever-rising medical care expenses. People are sometimes uncertain about enrolling in or using benefits because they don’t want to lose money in an account or have money somewhere they can’t easily access. With HRAs, this isn’t a concern. Employees can save on medical, dental, and vision costs without using their own personal funds. Even better, they’re able to do this before taxes.
There’s no avoiding all taxes…but employees can definitely go tax free on IRS-approved purchases with their HRA funds, for some relief. Funds in HRAs aren’t counted as part of an employee’s earnings, so employers can claim tax deductions on the money they put into the HRA fund. For an employee, HRA money isn’t counted as taxable income, and they get to use that same money—that they aren’t being taxed on—to purchase medical items and services.
Essentially, employees choose HRAs because they help with health care budgeting, can offset deductible and premium costs in a group health insurance plan, provide tax savings, and in some cases pay for medical expenses not covered by insurance. So you can say they serve as a huge job perk.
Ways to Use HRAs
There are a variety of ways HRAs can be administered and received. Usually, employers choose to cover some combination of medical only, medical and prescription, or medical and dental. Consider these types of HRAs employers can implement:
General Purpose: Covers all IRS-approved health care expenses. This type of HRA is sometimes referred to as a 213(d) HRA.
Medical and Prescription: This type of HRA covers only medical and prescription expenses.
Medical-Only: The medical-only HRA covers medical expenses.
Member Pay First HRA: For this type of HRA, employees must meet an initial deductible prior to having access to HRA funds. This type of HRA is sometimes referred to as a post-deductible or an out-of-pocket HRA.
Limited Purpose HRA: This type of HRA, restricted to vision and dental expenses, is often coupled with a health savings account (HSA).
Retirement HRA: Sometimes referred to as a Retirement Medical Savings Account (RMSA), this account type is restricted to post-retirement benefits and remains dormant until the employee becomes eligible.
Employers decide whether HRA funds are forfeited at the end of the plan year, or whether funds remain in the account year over year, depending on the type of HRA offered. Employers can limit the rollover to either a dollar amount or a percentage of the total account balance (again, contingent on HRA type offered).
An HRA may feature uniform coverage, or have funds deposited throughout the year. If the account has uniform coverage, the full annual election amount is available on the first day of the plan year. Alternately, a fund-as-you-go HRA will make funds available to employees on a specific, employer-defined contribution schedule.
Employers maintain control over account portability as well as the extension of benefits to spouses, dependents, and survivors of deceased employees.
- Retirement Portability: Employers can set the amount of HRA funds available at the end of the year that can pour over to a retirement account. The pour-over amount is set as a percentage of funds available at the end of the plan year.
- Termination Portability: If an HRA is designed to be portable, then the account will stay active after employment ends and even into retirement.
Which HRA is Right for You?
Get Our Quick-Guide Infographic!
Clearly, HRAs are flexible and customizable, and they also have their own unique compliance and eligibility requirements. To help you, we’ve designed an infographic to make the information on different types of HRAs easy to understand. Check out (and feel free to share!) our new visual aid that breaks down HRAs into the different categories: Retiree, QSEHRA, ICHRA, Standard HRA & Excepted Benefits HRA.
If you’re looking for more information about HRAs, we have it for both employers and employees.
That’s it! There’s all you ever wanted to know about HRAs. If you have any questions, feel free to contact ConnectYourCare anytime.
About the Author:
Carla Wardin lives in St Johns, Michigan, where she focuses her writing on the health and technology industries.