What is a health reimbursement agreement (HRA)?
A health reimbursement agreement (HRA) is an employer-funded plan that reimburses employees for qualified medical expenses and, in some cases, insurance premiums. Employers are allowed to claim a tax deduction for reimbursements they make through these plans, and reimbursement dollars received by employees are generally tax-exempt.
How a HRA reimbursement agreement works
A health reimbursement agreement is a plan put in place by an employer to cover the medical expenses of its employees. The employer decides on the amount he will put into the plan and the employee can request reimbursement of the actual medical expenses incurred up to this amount. All employees of the same class must receive the same HRA contribution.
An HRA is not an account. Employees cannot withdraw funds in advance and then use them to pay medical expenses. Instead, they must first incur the expenses and then have them reimbursed. Reimbursement at the time of service is possible if the employer provides an HRA debit card. An employee who uses all the funds allocated in the HRA before the end of the year will have to cover all subsequent health costs – or with the funds in a flexible spending account (FSA), also known as flexible spending. ), if applicable, or a health savings account (HSA) for employees who have a high deductible health plan (HDHP).
Key points to remember
- Employers, not employees, fund HRCs.
- An HRA is not portable; the employee loses this advantage when he leaves the company.
- Government rules, which employers can fine-tune further, determine what expenses can be reimbursed to employees.
- Depending on the type of HRA, the funds can be used to reimburse health insurance premiums, vision and dental insurance premiums, and qualified medical expenses.
- The rules for HRAs are significantly different from January 2020.
Benefits of health care reimbursement agreements
In 2019, HRAs can be used to pay for qualified medical expenses, which include prescription drugs, insulin, annual physical, crutches, oral contraceptives, paid meals during treatment at a medical facility, the care of a psychologist or psychiatrist, drug treatment, transportation costs incurred to obtain medical care, and much more. According to the rules of the Obama administration, they cannot be used to pay individual health insurance premiums.
From January 2020, the HRAs will change considerably. The government will allow employers to offer their employees a new type of HRA called individual HRA coverage instead of group health insurance. Employees can use these HRAs to purchase their own individual comprehensive health insurance with pre-tax dollars in or out of the Affordable Care Act health insurance market. HRA individual coverage can also reimburse employees for qualified healthcare expenses such as co-payments and deductibles.
In addition, under the new rules, employers who continue to offer traditional group health insurance may offer exceptional benefits to reimburse employees up to $ 1,800 per year in eligible medical expenses. Employees can subscribe to an “HRA with excepted benefits” even if they refuse group health insurance coverage, but they cannot use the funds to buy full health insurance. However, they can use the funds to pay for short-term health insurance, dental and visual insurance premiums and qualified medical expenses (click here and scroll down to Q 11 for more details).
Employees can use the money in their HRA to cover authorized medical, dental and vision expenses for their spouses and dependents.
Limits of health care reimbursement agreements
An HRA only covers qualified medical and dental expenses. According to the Internal Revenue Service (IRS), medical expenses are expenses incurred to relieve or prevent physical or mental illness, and not expenses to maintain general health, such as vitamins.
Expenses that are not considered necessary medical expenses include, for example, teeth whitening, maternity clothes, funeral services, health club membership fees, controlled substances, child care for a healthy baby, marriage counseling, medicines from other countries, and non-prescription drugs.
An employer can exclude certain medical expenses even if the expenses are qualified by the IRS. The employer’s reimbursable medical expenses will be listed in the HRA plan document for employees.
HRA funding and transferability
The healthcare reimbursement agreement is funded only by the employer, who also decides the maximum annual contribution for each employee’s HRC. With the new HRA rules in January 2020, employers still determine how much to contribute to employees’ HRAs, except that all workers in the same category of employees must receive the same contribution, as noted above. Older workers or workers with dependents may receive more.
Any HRA money that is not spent at the end of the year can be carried over to the following year, although an employer may set a maximum turnover limit which can be carried over from one year to the next. In addition, if an employee is dismissed or leaves the company to work for another company, the HRA does not support them. (This makes it different from an HSA, —health savings account — which is portable. See below for more.)
HRA tax benefits
For employers, reimbursements via the HRA are 100% deductible. As an alternative to health care for more expensive retirees, an employer can use an HRA to cover the health costs of retired employees. In addition, since the plans are fully funded by employers, they provide predictability, which allows employers to anticipate their approximate maximum expenses for HRA health benefits for the year.
Employees can use the arrangement to pay for a wide range of medical expenses not covered by their health insurance policies. Depending on the type of HRA, they can also use it for medical, dental or visual insurance premiums. In addition, refunds are tax exempt up to a maximum amount for a period of coverage. Some companies may offer employees the added benefit of other employer-provided health benefits, such as an FSA, in conjunction with an HRA.
Methods of reimbursement of health costs compared to other methods
An employee who has both an FSA and an HRA – and whose expenses are eligible for reimbursement through both plans – cannot choose which one will cover the expenses. Instead, the costs will be reimbursed by the plan that the employer has in place to pay first. When this primary plan is exhausted, the second plan will be used to cover all subsequent eligible medical expenses that are reported for reimbursement.
Here are two more options to finance reimbursable medical expenses.
An FSA is funded from a portion of an employee’s pre-tax salary, and unlike an HRA, each employee determines the amount of money to spend on these agreements each year – up to $ 2,700 in 2019. Unused funds in HRAs can be carried over to the following year at the discretion of the employer. Unused FSA funds generally cannot be used in the next plan year, although an employer may offer a short grace period or allow deferral of up to $ 500.
Compared to an HRA, a health savings account (HSA) is a fiscally acquired account which is not subject to confiscation if the funds remain in the account at the end of the year. An HSA is associated with a high deductible health plan (HDHP) to pay for medical and dental costs. The account is funded by the employee and / or the employer and, like an FSA, cannot be used to pay insurance premiums. Unlike HRAs and FSAs, employees can keep their HSAs if they change employers.