What is an HRA or Health Reimbursement Arrangement?

Section 105 of the Internal Revenue Service (IRS) regulations allow for reimbursement of medical expenses under an employer sponsored health plan. This is also known as a Health Reimbursement Arrangement or HRA. Under the HRA, the employer will provide the funds to reimburse members for those eligible expenses that have been incurred. Some examples of eligible expenses include deductible, co-pays and coinsurance along with dental and vision claims as well. What will be covered is determined by the employer and their goals regarding employee benefits.

Advantages for the employer by offering an HRA include qualified claims being tax deductible, the flexibility to design plans that will enhance the overall employee benefit package and having more choices with the potential of greater control over costs. Advantages for the employee include rolling over unused funds into the next plan year, contributions made by the employer are excluded from the gross income of the employee and reimbursements for qualified expenses may be tax free.

From time to time there is the misconception that an HRA and FSA (Flexible Spending Account) are truly one in the same. While they are similar, there are some distinct differences. The HRA is funded only by the employer, no employee contributions are allowed. The HRA can only reimburse what is available in the account at that particular time. While the amount elected in the FSA is available from day one of the plan year. HRA regulations do not require an eligible expense be incurred in the current plan year; only that the member be an active participant in the HRA at the time of the expense. The employer does have the option to allow this expense to occur or not. A member can elect both an HRA and FSA if the employer offers the two and the member meets all eligibility requirements.

A common question for members participating in an HRA is “what happens to the account balance if they leave the company”? There are two different options that are available when this occurs and one is unique to HRA’s. First, an employer can allow the employee to continue the HRA through COBRA. The employee would fund 100% of the premiums for the HRA and any health plan it might be tied to. The second and unique feature is referred to as the spend-down provision. This would allow an employee no longer with the company to use the existing HRA balance for expenses incurred after employment has ended. The employer does control if this will be an option for members along with which qualifying events are eligible, how much of the available funds can be used and how long the ex-employee has to use the funds.

With the majority of the regulations for ACA now in place, the deductible reimbursement plan option may no longer be available for certain segments of the market. However, the HRA is still to be considered a viable alternative for those looking to replace or enhance certain aspects of a benefit package for employees.

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