Health Reimbursement Arrangements (HRAs), are one of the few employer-funded, tax-advantaged benefits that can be used to pay for out-of-pocket medical expenses, and sometimes health insurance premiums.
If your employer offers an HRA, it’s important to understand the type of HRA it is as well as the specific rules that govern how you can use it. Participating in an HRA isn’t going to be right for every employee and their family or health situation. But for those who might benefit from this type of account, it can provide much needed help in paying for healthcare costs.
What is a Health Reimbursement Arrangement (HRA)?
An HRA is an account from which employees can reimburse for qualified health expenses. It is completely employer funded and the contributions the employer makes are tax-free to the employee. The employer gets to choose how much is available for reimbursement each month as well as the types of expenses for which employees can reimburse. Since these accounts are owned by the employer, the employee will lose access to the money once they leave the company (unless the employer has decided to extend access via COBRA or in retirement).
It’s important to note, HRAs are not health insurance. Employers set an allowance amount of tax-free money to offer their employees. Employees are able to purchase the health care items and services identified in 213(d), which may include health insurance (if they have a specific type of HRA), and the third party administrator on behalf of the plan sponsor will reimburse the employee up to the determined allocation.
HRAs can be a great way for companies to offer health benefits and to help pay for medical expenses that are not covered under health insurance. For small businesses that cannot provide group health insurance, HRAs can be an excellent option.
HRAs have been around for several years, as of 2023, the some of the most popular types of HRAs are available:
- The qualified small employer HRA (QSEHRA)
- The Integrated or Standard HRA
- The Individual Coverage HRA (ICHRA)
- The Retiree HRA
- The Excepted Benefit HRA (EBHRA) Each type of HRA has its own rules that are set by the IRS, and employers can add additional provisions so be sure to read the fine print for your specific plan. But in general, these are the rules that govern an HRA.
An HRA is funded entirely by employers
Unlike FSAs and HSAs that allow employees to contribute pre-tax dollars, HRAs are only funded by the employer (or plan sponsor). Employers decide how much they want to contribute to an employee’s HRA. QSEHRAs and EBHRAs are the only HRA types that have annual limits. Employers that offer some of the other HRA types have full discretion over the amounts they want to contribute.
The types of reimbursable expenses for HRAs vary greatly
IRS Publication 502 is the best up-to-date guide for which expenses are eligible to be reimbursed from your HRA. But this is just the baseline for what the IRS allows, when it comes to an HRA, it’s not the final say. Employers can place further restrictions on what may and may not be a reimbursable expense. This makes it important to look closely at the plan’s guide to ensure you don’t end up with an expense that won’t be reimbursed.
Your dependents are not automatically covered under HRAs
Employers can choose whether the HRAs just cover the employee or the employee and their dependents. Each HRA will define its own rules. Of note, for some types of HRAs, including Standard HRAs, if dependents are going to be covered by an employee’s HRA, they must also be enrolled in a qualifying health plan.
Most HRAs require co-enrollment in a qualifying health plan
- Standard or Integrated HRAs. These HRAs are also known as group plan HRAs, that’s because participants in Integrated HRAs must also be enrolled in a group health plan through their employer or their spouse’s employer. Any spouse or dependents that will also be covered by the HRA (i.e. you can reimburse for their expenses through the account) must also be co-enrolled in a group health plan.
- ICHRAs. To participate in an ICHRA you must be co-enrolled in a qualifying health insurance plan that you have purchased in the private market. You cannot have secondary coverage from your spouse’s employer’s group plan.
- QSEHRAs. To participate in a QSEHRA you must be co-enrolled in qualifying health insurance coverage (i.e. what the IRS considers “minimum essential coverage”).
- EBHRAs. There is no co-enrollment requirement for EBHRAs.
- Retiree Only HRAs. There is no insurance co-enrollment requirement for Retiree Only HRAs.
Some HRAs can be used to reimburse for health insurance premiums
- ICHRAs. These types of HRAs are offered in lieu of a group health plan and thus can be used to pay for health insurance premiums in the private market.
- QSEHRAs. These types of HRAs are offered in lieu of a group health plan and thus can be used to pay for health insurance premiums in the private market.
- EBHRAs. These can be used to pay for COBRA, vision and dental insurance premiums, as well as other qualified and employer-selected medical expenses.
- Retiree Only HRAs. These can be used to pay for Medicare premiums.
Employers set many HRA rules, so read the fine print
As we’ve seen, employers have a lot of say in how HRAs work for their employees. HRA rules can be complicated. The allocated amount, reimbursement of eligible expenses, what happens when employees are no longer eligible (either by termination and/or retirement) and the reimbursement request process are just some things the employer has control over. Since HRAs have many moving parts, it is vital to read your employer’s plan in detail so you don’t miss any information regarding your benefit.
HRAs can be a great benefit to help employees pay for medical expenses. If your employer offers one, take some time to consider utilizing the benefit. If your company is considering offering an HRA along with your group health insurance plan, reach out to Lively to discuss our easy-to-use HRA.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.