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How Does a Health Reimbursement Account Work?

9 min read

30 sec brief

It used to be that when you heard the term “health benefits” your mind went straight to health insurance. In today’s world, it’s harder for companies to offer traditional health insurance benefits. Thankfully, other options exist.  One of those options is a Health Reimbursement Arrangement (HRA), also known as a Health Reimbursement Account. In an…

It used to be that when you heard the term “health benefits” your mind went straight to health insurance. In today’s world, it’s harder for companies to offer traditional health insurance benefits. Thankfully, other options exist. 

One of those options is a Health Reimbursement Arrangement (HRA), also known as a Health Reimbursement Account. In an HRA, employers decide on a monthly allowance. You, the employee, can then purchase health care items and services that fit your specific needs.

Let’s explore the four general steps of how to use an HRA:

The company sets an allowance amount. The business sets a monthly amount of tax-free money to offer each employee. There are several types of HRAs and each has different limit amounts, which we’ll touch upon later in this post. 

Employees purchase healthcare items and services that fit their needs. For the most part, services or items listed under IRS Code Section 213(d), view IRS Publication 502 for detailed expenses, are eligible for reimbursement, including health insurance premiums. To note, companies do have some say in what they will reimburse, so be sure to read the fine print.

Employees submit proof of purchase for eligible healthcare items and services. When you incur an expense, you must submit the expense to your company. You’ll have to include some documentation such as a description of the item or service, cost, and the date the expense was incurred. Items such as invoices, receipts or EOBs (explanation of benefits) typically suffice for this requirement.

The company reimburses the employee. Once reimbursement requests are submitted, the company will review them, and if the expense qualifies, reimburse you from your monthly allowed benefit. If the expense does not qualify, the company has to follow a declined claims and appeals process which is outlined in their HRA documents.

These are the four general steps to how HRAs work. However, there are many types of HRAs and each has slightly differing rules. Let’s go over each type of HRA process while noting the differences with each.

How stand-alone HRAs work

The stand-alone HRA was one of the first HRAs that was available to businesses of all sizes and followed the process above. 

The stand-alone HRA was used by many before 2014. In that same year, the IRS and the Departments of Labor and Health and Human Services issued guidance on the Affordable Care Act, limiting its use.

The guidance given by the departments stated that an HRA is a group health plan and must comply with the Affordable Care Act’s group plan requirements. The Departments concluded that stand-alone HRAs do not comply because of the requirement to include a prohibition on annual limits and cover preventative care. Due to this, businesses could no longer use stand-alone HRAs to pay individual premiums for employees.

Here’s the silver lining for stand-alone HRAs, President Donald Trump issued an executive order to the Secretaries of the Treasury, Labor, and Health and Human Services to contemplate increasing the flexibility and use of HRAs in 2017. This could potentially bring the stand-alone HRA back into play.

How qualified small employer HRAs (QSEHRA) Work

In December 2016, the 21st Century Cures Act created the qualified small employer health reimbursement arrangement (QSEHRA).

QSHERAs follow the basic HRA structure but do have a few limitations not seen with the other types. Let’s go over the four-step process, noting the differences.

The allowance limit is set. In 2019, employee annual allowances are limited to $5,150 for self-only employees and $10,450 for employees with families. These allowances must be offered to all employees meeting eligibility criteria. Companies can only offer different amounts based on family status.

Employees purchase what fits their needs. You can purchase healthcare items and services listed in IRS Code Section 213(d). Again, the company does have the ability to limit this list, so be sure to find out exactly what your plan will reimburse for.

Employees submit proof of purchase. Documentation is required such as a description of the item or service, the cost and the date of purchase.

Employers reimburse. The company reviews and reimburses qualified requests. If not qualified, they have to follow a denied claims and appeals process.

How one-person stand-alone HRAs work

One-person stand-alone HRAs are another type of HRA.

In the 2014 guidance, the IRS and Departments of Labor and Health and Human Services made an exception for stand-alone HRAs for one person.

One-person stand-alone HRAs follow the same process as the HRA. However, the plan must include eligibility requirements which clearly state participation is only available to one person.

Let’s take a look at the four-step process with the specifics for one-person stand-alone HRAs.

The company sets an allowance amount. The business sets eligibility requirements for the HRA based on criteria that stipulates only one employee is eligible for the benefit. Once complete, the business determines a monthly amount of tax-free money to offer the employee. To note, there are no contribution limits on this type of HRA.

Employees purchase healthcare items and services that fit their needs. Most items listed under IRS Code Section 213(d), (view IRS Publication 502 for detailed expenses), are eligible for reimbursement, including health insurance premiums. Remember, companies do have some say in what they will reimburse, so read the fine print.

Employees submit proof of purchase for eligible healthcare items and services. When an expense is incurred, the expense has to be submitted to your company. Be sure to include the correct documentation such as a description of the item or service, the cost, and date the cost the date the cost was incurred. Items such as invoices, receipts or EOBs (explanation of benefits) typically suffice for this requirement.

The company reimburses the employee. Once reimbursement requests are submitted, the company will review them, and as long as it qualifies, reimburse you from your monthly allowed benefit. If the expense does not qualify, the company has to follow a declined claims and appeals process which is outlined in their HRA documents.

How integrated HRAs work

Another type of HRA available to businesses is the integrated HRA.

Integrated HRAs are combined with a group health insurance policy. These HRAs are an option for all sizes of businesses and are offered along with a high-deductible group policy.

Integrated HRAs follow the same basic structure as noted above, with a few specific requirements.

The company sets an allowance amount. The business sets a monthly amount of tax-free money to offer each employee. In this type of HRA, a company can offer differing allowance amounts to employees based on bona fide job criteria. In addition, eligibility is only available to those who participate in the company’s group health insurance.

Employees purchase healthcare items and services that fit their needs. Most items listed under IRS Code Section 213(d), (view IRS Publication 502 for detailed expenses), are eligible for reimbursement, including health insurance premiums. Remember, companies do have some say in what they will reimburse, so read the fine print.

Employees submit proof of purchase for eligible healthcare items and services. When an expense is incurred, the expense has to be submitted to your company. Be sure to include the correct documentation such as a description of the item or service, the cost, and date the expense was incurred. Items such as invoices, receipts or EOBs (explanation of benefits) typically suffice for this requirement.

The company reimburses the employee. Once reimbursement requests are submitted, the company will review them, and as long as the expense qualifies, reimburse you from your monthly allowed benefit. If the expense does not qualify, the company will follow a declined claims and appeals process which is outlined in their HRA documents.

HRAs are a nice way for employers to help employees pay for healthcare expenses. If your employer offers one, be sure to take a close look to determine if it is a good option for you.

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.

About the author

Vicky Warren

Vicky Warren, once a nurse, now a freelance healthcare writer and social media coach.

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