What is a Health Reimbursement Account?
Health Reimbursement Accounts or Health Reimbursement Arrangements (HRAs) are programs sanctioned by the Internal Revenue Service (IRS) that give an employer the ability to reimburse health care costs paid by their employees who enroll in the group plan. They are employer-sponsored plans that reimburse workers for medical services that the group plan does not cover.
As the employer funds the insurance plan, any distributions are tax deductible for the employer. Typically, reimbursement the employee receives is exempt from being taxed. HRAs are started by the employer, who chooses how the account will operate. Depending of the employer’s preference, their HRA accounts can have a credit balance like a savings account that can be rolled over from one year to another. It is up to the employer to decide whether to implement the rollover feature and how much rolls over, which can be a set amount or a percentage. Leftover dollars can be used from year to year as long as the employe stays on the plan.
Contributions & Distributions
The IRS defines HRA contributions as funded solely by an employer. Contributions cannot be paid through an agreement to reduce the pay of an employee, such as a cafeteria plan. Employer contributions have no limit, and they are not considered part of a worker’s income. This saves employees valuable tax dollars, while being approved by the federal government.
Employees are reimbursed tax free for qualified health care costs up to a maximum dollar amount for copayments, coinsurance, deductibles, and services not covered by the group plan. This is applicable for a set coverage period, such as the annual term of a worker’s policy.
The employer has the right to make alterations or cancellations to distributions whenever they choose, as they are in control of funding the HRA. Because the employer pays for the account, reimbursements will not be taxed.
Reimbursed Medical Expenses
Health care costs that qualify for reimbursement include those expenses defined by your employer, in compliance with section 213(d) of the Internal Revenue Code. This can include coinsurance, deductibles, prescription medications, dental care and vision care. An employer’s summary plan description should detail which services are eligible for reimbursement, otherwise you should contact the insurance company’s spending account department.
A general list of IRS-approved health-related reimbursements is available in Publication 502 from the IRS website. Qualifying medical costs do vary by employer, which is important to keep in mind. Some of the expenses listed in publication 502 may not be included in your particular HRA plan. Make sure to verify the eligibility of any questionable expense with a Benefit Administrator prior to submitting an HRA expense.
If you have an HRA, your dependents are also eligible for reimbursement. As long as your dependent meets the definition defined by the IRS and is included in your employer’s plan, you can be reimbursed for their expenses.
Reimbursements through HRA accounts can be made to current or past employees, in addition to spouses and dependents of employees. They can also be made to anyone the worker could claim as a dependent on their tax return with the exception of that person filing a joint return, earning an income of at least $3,400, or the worker (or their spouse if filing jointly) being claimed as a dependent on someone else’s return. Dependents and spouses of deceased workers are also qualified to receive reimbursements.
There are several advantages for both parties in use of an HRA. For employers, is it beneficial by providing tax deductions on every reimbursement. They also are in control of the expenses related to their health plan. Employees can find HRAs useful because the contributions are considered separately from their salary. Additionally, if the worker pays qualified medical costs, they are not likely to be taxed on the reimbursement.
The rollover feature of many HRAs is also a bonus for employees, as funds can be reserved for later use if the reimbursement was not used within the year it was issued. HRAs may be eligible for use with other health plan benefits through their workplace, such as Flexible Spending Accounts.
A standard group plan does not offer reimbursement on not covered care, which gives the employee and their family the ability to seek the health care they need and be paid back. There is also no specific plan type assigned to be compatible with an HRA. As long as the employer offers group coverage and an HRA, it is available to the worker if they have met the requirements.
HRA arrangements follow various laws, rules, and requirements such as COBRA, HIPAA, and ERISA. Some rules are considered contradictory by plan members in many cases, and result in obtaining healthcare services that were thought to be permitted, and were then considered disallowed. There are also several limitations on HRAs, including self-employed individuals being ineligible in most cases. Also, those who are paid over a certain amount may be subject to limitations, which vary based on employer.