Your Guide to Health Reimbursement Arrangements

Introduction

When it comes to discussing the myriad of options for health insurance and supplemental accounts, the health reimbursement arrangement (HRA) doesn’t always get much air time. But as group health insurance plans become less affordable for smaller employers, HRAs are becoming a more common option for employers of many different sizes.

This guide will walk you through what an HRA is, how it works, the benefits to participating in one and how HRAs are similar to and different from HSAs and FSAs for both employers and employees.

What is an HRA?

An HRA is an employer-funded account employees can use to pay for out-of-pocket medical expenses. Out-of-pocket medical expenses may include: copays, coinsurance, prescriptions, dental and vision care, and health insurance premiums, depending on the type of HRA you have.

While an HRA is not a health insurance plan, some types of HRAs can be used to purchase a health insurance plan.

The IRS gives employers a lot of power over the parameters and administration of their HRAs. Including:

• Employers get to choose how much to deposit into the account. While some types of HRAs have annual maximum allocations, other types, including an integrated HRA, do not.
• The IRS determines the expenses for which an HRA can be used, but employers can choose to further restrict that list.
• Employers can choose whether or not to rollover some or all of the HRA contributions you have left over at the end of the year.
• Employers can choose to tie debit cards to their HRAs so employees can pay for medical expenses at the point of sale.
• If there is no debit card, employees will be required to submit expenses for reimbursement.
• If an employer offers both a Flexible Spending Account (FSA) and an HRA, it can choose which account must be used first when paying for medical expenses.
• Employers can choose to make employees’ HRAs available immediately to help them pay for out-of-pocket expenses, or they can require employees to pay for expenses first, up to a certain amount, before they can use their HRA.

Employers receive a tax deduction for the reimbursements they make for an employees’ health expenses through an HRA. HRAs are not portable, so when an employee leaves the company, unless COBRA is elected, the employer can choose to keep what remains in an individual’s account. If an employee retires, an employer can choose to make an employee’s HRA available to them after they leave. Employers should always consult a tax or legal advisor for further questions or guidance.

Types of HRAs

Below are five popular types of HRAs. Each serves a slightly different purpose.

Integrated, Standard, or Group Coverage HRAs

Integrated or Standard HRAs are accounts employers can offer as an added benefit to a qualifying group health insurance. They can only be used to reimburse or pay for qualified medical expenses like coinsurance, prescriptions, or standard 213(d) expenses.

In order to participate in an Integrated HRA, the person must be co-enrolled in a group health plan either through their employer or their spouse’s. This is true for anyone whose expenses will be reimbursed through the account, including spouses and child dependents.

Integrated HRAs have no annual contribution limits, so employers can choose the amount they’d like to deposit into the account.

Qualified Small Employer HRA (QSEHRA)

The QSEHRA is available to employers with less than 50 employees. The purpose of this type of HRA is to provide a way for employers to help employees purchase health insurance in the private market. The HRA contributions can also be used for qualified medical expenses like copays, coinsurance, and prescriptions.

In order to participate in a QSEHRA, the employee and anyone for whom they’d like to reimburse expenses must be co-enrolled in a health insurance plan that meets the ACA definition of minimum essential coverage.

There is an annual contribution limit for this type of HRA. For 2023, the limit for individuals is $5,850 and for families it’s $11,800.

Individual Coverage HRA (ICHRA)

The ICHRA allows individuals (i.e. people buying health insurance plans in the private market) to reimburse for health insurance premiums as well as out-of-pocket medical expenses. It’s available to all employers regardless of size and the IRS has no set limit on the annual amount that can be contributed to the ICHRA.

There are a few rules that go along with this type of HRA: 1. You and anyone for whom you’d like to reimburse expenses must have enrolled in a qualifying health insurance plan by the time the HRA begins. A qualifying health plan is one that meets the ACA definition of minimum essential coverage. 2. Employers must offer this to employees in lieu of a group health insurance plan. However, employers can choose to offer a group health plan to one class of employees (e.g. salaried employees) and an ICHRA to another class (e.g. hourly employees) provided that all employees of the same classification are offered the same options. 3. If you’re offered an ICHRA you’re still eligible for a tax credit if your HRA doesn’t meet the minimum standard for affordability (as set by the IRS) and you opt out. If your employer’s HRA does meet the minimum standard for affordability, you won’t be eligible for a tax credit even if you opt out.

Excepted Benefit HRA (EBHRA)

EBHRAs allow you to reimburse for premiums for COBRA coverage or short-term medical plans, dental and vision coverage as well as other qualified medical expenses. The annual contribution limit for EBHRAs is $1,950 in 2023. It is adjusted annually. There is no co-enrollment requirement for EBHRAs.

Retiree HRAs

Retiree HRAs provide reimbursements for qualified medical expenses to retirees aged 65 and older. They are not required to be paired with any type of medical coverage but are intended to reimburse retirees for premiums associated with individual Medicare supplemental coverage or individual Medicare Advantage plans. Some Retiree HRAs will also reimburse for premiums for dental and vision coverage. The IRS has not imposed any annual limits for Retiree HRAs.

How does an HRA work?

Some HRAs have no federal limit and the annual contribution amount is set each year by the employer. These types of HRAs are: Individual Coverage HRAs, Integrated or Standard HRAs, and Retiree Only HRAs. The other types of HRAs, such as Qualified Small Employer HRAs and Excepted Benefit HRAs, have annual contribution limits that are set by the IRS each year.

The key to understanding how HRAs work is in the R - reimbursement. Because an HRA is considered a "notional arrangement," an enrolled employee will not receive funds from their HRA until they show a receipt for a qualified expense. This means that employers will reimburse funds from an HRA after an employee makes a qualified medical expense. Employees may also have to submit a substantiation document to prove they’re covered by a qualifying insurance policy.

In general, most HRAs follow a similar structure, though specific rules and regulations will vary depending on the type of HRA.

1. Employers set an allowance. Each year, the employer sets their annual limit for how much they will reimburse employees (not to exceed any applicable federal limits for the type of HRA they offer) and communicates this to employees during open enrollment.
2. Employees make a qualified expense. Employees enrolled in the HRA pay for qualified expenses. Some HRAs allow for reimbursement of all of the items and services listed under IRS Code Section 213(d), including health insurance premiums. Others do not allow reimbursement for health insurance premiums or copays and can only be used for out-of-pocket expenses like coinsurance responsibilities or deductibles. In most circumstances, the employer can further restrict the expenses for which their HRA can be used beyond IRS regulations. Some HRA providers also offer an HRA Debit Card payment option, this allows the employee to make a purchase with HRA funds using the Debit Card, rather than paying out-of-pocket.
3. Employees submit a receipt. An employee submits proof of expense, which is known as substantiating a claim in the benefits industry. Employees may substantiate their claim with receipts or an Explanation of Benefits (EOB) documentation
4. HRA administrators review proof of expense. They look for five things on a proof of expense: The name of the person who received the service, the provider or merchant name, the type of service or product, the date of the expense, and the amount. If the documentation submitted by the employee shows the employee incurred a qualified expense, the HRA administrator approves the expense for reimbursement.
5. Employers provide reimbursement to the employee. The employer, either via an HRA provider or themselves, will provide reimbursement for qualified expenses either via direct deposit or check, as long as their expense stays within their allowance and plan period.

Remember: all HRA administrators are different. Be sure to double-check with your employer for the correct reimbursement procedures.

How do I open an HRA?

First and foremost, you can only open an HRA if your employer offers one. If your employer does offer an HRA, you’ll find out both the type of HRA and the amount they contribute at the time of open enrollment. You’ll need to opt in at this time if you’d like to use this benefit.

Do I qualify for an HRA?

According to the IRS, employers can offer an HRA to different classes of employees. Some of these segments of employees include:

• Full-time, part-time, or seasonal status
• Employees covered by a collective bargaining agreement
• Salaried or non-salaried (like hourly workers) employees
• Employees who haven't satisfied a waiting period
• Non-resident aliens with no U.S.-based income
• Employee work locations
• Any combination of 2 or more employee types listed above

The eligibility requirements vary per type of HRA. Some HRA types allow the employer to add their own eligibility parameters in addition to those set by the government and within certain guidelines. Be sure to speak to your employer to ask about eligibility requirements at your company.

Additional HRA rules

If you have one of the following HRAs, there are some additional rules that apply:

Standard or Integrated HRAs

Employees must also be enrolled in their employer’s or spouse’s employer’s group health plan to have a standard or integrated HRA. Employees can use their HRA for eligible dependents as long as those dependents are covered by the same qualifying health insurance policy. This includes:

• A spouse
• Children under the age of 27
• Tax dependents

ICHRA

If your employer offers an ICHRA and you opt in, you must purchase a qualifying health insurance plan through the private market by the time the HRA begins. Your employer will ask for proof of coverage.

QSEHRA

If your employer offers a QSEHRA and you opt in, you must purchase a qualifying health insurance plan through the private market by the time the HRA begins. Your employer will ask for proof of coverage.

What can I use an HRA for?

The expenses for which you can use your HRA depend on the type of HRA you have.

Integrated or Standard HRA and Retiree HRA

These types of HRAs are the most similar to other types of health insurance supplemental accounts. You can use the money in your HRA account to pay for qualified medical expenses like coinsurance, prescriptions, emergency care, mental health, breast pumps, etc. You can use your HRA for yourself as well as your spouse or dependents if you are all on the same group insurance plan.

QSEHRA

You can use this type of HRA to pay for health insurance premiums as well as qualified medical expenses like copays, coinsurance, prescriptions, etc. You can use your HRA for yourself as well as any of your dependents, regardless of whether you have an individual or family plan. But anyone for whom expenses are reimbursed must be covered by a health insurance plan that meets the ACA definition of minimum essential coverage.

ICHRA

You can also use this type of HRA to pay for health insurance premiums as well as qualified medical expenses. You can use this HRA to pay for your health insurance premiums as well as qualified medical expenses for you and your dependents. But anyone for whom expenses are reimbursed must be covered by a health insurance plan that meets the ACA definition of minimum essential coverage.

EBHRA

The EBHRA can be used to pay for health insurance premiums for short-term health insurance, and dental and vision coverage. It can also be used to pay for qualified medical expenses related to dental, vision and short term health coverage. You can use your HRA for yourself as well as any of your dependents, regardless of whether you have an individual or family plan.

What HRAs don’t pay for

HRAs can’t be used for expenses like the following, which is not an exhaustive list:

• Gym memberships (except with a letter medical necessity)
• Vitamins (except with a letter medical necessity)
• Couples counseling
• Maternity clothes
• Childcare

Benefits of an HRA

An HRA can offer cost savings for employers and greater healthcare options for their employees. The benefits of offering a standard/integrated HRA as an employer are:

• Lower health insurance premium rates: More claims with HRAs means fewer claims filed with the insurance carrier, helping maintain or lower insurance premium rates.
• Tax savings: Employee reimbursements are tax-deductible for your business
• Plan design flexibility: Standard HRAs may be configured to fit your organization’s needs. Customize your contribution schedule, extension options, plan duration, and more.
• Diverse benefits package: Attract and retain employees with benefits for a variety of health plans and medical needs.

One of the primary benefits of participating in an HRA as an employee is flexibility and choice. An HRA provides a supplement to group health insurance coverage and employees don’t have to buy a specific type of health insurance plan in order to access it. Here are some of the other benefits:

• Tax-advantaged: The money that your employer contributes to an HRA is not considered part of your income. This means that you will not be taxed for your HRA allowance.
• Lower cost: Since your employer is the one funding your HRA, there is a possibility that you may end up paying less for your health care in the long-run.
• Tax-free reimbursements: After paying for your healthcare expenses out-of-pocket, the reimbursements that you receive from your employer are not taxed.
• Rollover possibility: If an employee doesn't use up all the resources within their HRA, their employer can choose to roll over those funds into the next month or year, depending on the type of HRA implemented.

HRA vs. HSA

HRAs and HSAs have a similar purpose: to help participants pay for health-related costs tax-free. They just work very differently.

HRAs are employer owned and operated. The employer decides how much to contribute to the account (some HRAs have annual caps), on what you can spend the money (within the IRS parameters), whether or not you can roll over your leftover money at the end of the year, and whether or not your HRA is immediately available to you or if you have to spend a certain amount before you can tap into it. Since the money in the HRA account is owned by the employer, it’s not portable. Meaning if you leave the company, you leave all deposits behind unless your employer extends access to them via COBRA.

The benefit to having an HRA is that you can pair this account with any type of health insurance plan. And if you have a QSEHRA or an ICHRA, you can use your HRA deposits to pay for health insurance premiums. While there are different types of HRAs, all with different purposes, but there is only one type of HSA.

HSAs are regulated by the IRS and owned by the participant. Anyone can deposit money into the HSA (you, employer, family member, etc.) and those deposits will remain tax-free. Any deposits you make are tax-deductible. The annual contribution limits are set by the IRS for individual and family plans. Account holders can also invest your contributions and any growth they experience is also tax free.

In order to contribute to an HSA, the IRS requires participants to be enrolled in a High Deductible Health Plan (HDHP), among other requirements. But because participants own the HSA contributions (even those their employer makes), if you change your health insurance plan or otherwise become ineligible, you can still use your deposits for qualified medical expenses. And when you turn 65, you can begin using your HSA as a traditional retirement account.

HSAs are portable, meaning you can take the accounts with you from employer to employer to unemployed and never lose access to your money. The one thing you can’t ever do with your HSA is pay for health insurance premiums.

HSAs and HRAs can be paired together if the HRA is an EBHRA, ICHRA or a Retiree HRA and the account holder also is enrolled in a HDHP. In terms of an ICHRA, the rules are very specific for how these two types of accounts can work together. ICHRA can be compatible with an HSA if set up specifically only to reimburse premiums for insurance not purchased through a healthcare exchange. If you have another type of HRA, you can still use the deposits already in your HSA, you just can’t make new ones until your HRA is no longer active.

HRA vs. FSA

HRAs and FSAs are more similar to each other than HRAs and HSAs. As mentioned above, HRAs are completely owned and operated by the employer. FSAs are similar. The employer owns the FSA, which means the account is not portable and it’s up to the discretion of the employer whether or not you have access to any leftover funds at the end of the year. But there are some nuances that make FSAs function differently than HRAs.

Employers don’t have as much say over the operation of FSAs as they do over the administration of HRAs. The IRS sets annual contribution limits for FSAs as well.

When it comes to rollovers, an employer can choose to offer one of the following: a 2 ½ month grace period in which employees must use the remaining money or a $610 rollover (as of 2023) to the following year. If an employee chooses to roll over any of your contributions it won’t affect the amount they’re eligible to contribute that following year.

Another nuance is that FSAs have a longer list of qualified expenditures than most HRAs. Like with HSAs, FSA contributions cannot be used to pay for health insurance premiums. But you can use your FSA to pay for a wide number of general health items that may not be covered under your HRA.

Unlike with HSAs, you can participate in both an FSA and HRA at the same time. Your employer will decide which account pays for your medical expenses first. When that first account has been depleted, the other account becomes available.

Should I participate in an HRA?

HRAs can be a great option to help supplement the cost of medical care or to help you purchase private health insurance if your employer either doesn’t offer a group plan or that group plan doesn’t meet your needs. Just make sure to read the fine print before opting in.

Things to look for are:

• Annual contribution amount.
• When you can begin accessing the money.
• Rollover capabilities.
• The types of care and prescriptions that are covered.
• Can you use it to pay for health insurance premiums?
• How do you access the money: is it a debit card or do you need to submit expenses for reimbursement?

To make your decision, take the information you gather and compare it to what opportunities you’d be giving up by participating in said HRA (e.g. tax credit, group health insurance, HSA, etc.). There may not be an option that meets all of your needs, but choose the health insurance plan and supplemental account that meets the most of them. Then make sure to sign up during open enrollment.

Whether or not you decide to participate in an HRA, it’s important to know you have options when it comes to health care coverage. Choose the arrangement that makes the most sense for your family and reevaluate annually as situations change. As always, if you have questions about your specific plans, reach out to your HR department or plan administrators.

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.