What is a Medical Reimbursement Account?
Medical Reimbursement Accounts are IRS-approved plans wherein an employer reimburses an employee, their spouses, and dependents for medical expenses. Because the reimbursement occurs pre-tax via payroll, employees and employers often save up to 50% in combined taxes on the cost of medical expenses.
A medical reimbursement account gives employers greater control over monthly health benefits costs, and gives employees more choice in their health care coverage. With medical reimbursement, the employer sets their own parameters:
- What is covered
- Maximum contribution per employee class
- What happens to unused funds
Medical Reimbursement Accounts must be funded solely by the employer, and cannot be funded by the employee through salary deductions. Medical Reimbursement Accounts are not subject to the same plan design requirements that apply to Flexible Spending Accounts and Section 125 cafeteria plan.
Medical Reimbursement Accounts by Another Name
The term "Medical Reimbursement Account" is synonymous with many other terms, and can be used interchangeably with the following:
- Health Reimbursement Arrangement (HRA)
- Health Reimbursement Account (HRA)
- Health Reimbursement Plan (HRP)
- Medical Expense Reimbursement Plan (MERP)
- Medical Reimbursement Plan (MRP)
- Section 105 Plan
Health Reimbursement Arrangement is the most common term, and the one that is used most frequently on the Zane Benefits website.
How does a Medical Reimbursement Account Work?
A Medical Reimbursement Account is essentially a business expense account for healthcare, where employees must turn in receipts in order to get reimbursed. These receipts are required to be stored for up to 7 years for IRS auditing purposes. The IRS will not allow tax deductions via a Medical Reimbursement Account if the expenses were not qualified medical expenses.
The business must set up the account; it cannot be set up by an individual or employee. Formal plan documents must be written, which establish the rules of the account. The employer determnines the amounts available to each class of employee. Employee classes must be based on bona fide job criteria, such as hours worked or number of years with the company.
As eligible expenses are submitted, the business reimburses the employees (100% tax-free) up to the maximum contribution amount. Unused funds are typically carried over year-to-year, although this is a distinction the employer determines in the plan documents.
Coverage Under a Medical Reimbursement Account
Current employees, former employees including retirees, their spouses and dependents, and the spouses and dependents of deceased employees, can be covered under a Medical Reimbursement Account. Former employees and retirees can continue to receive medical reimbursements under a Medical Reimbursement Account even if they do not elect COBRA coverage. The account can have a provision allowing former employees or retirees to be reimbursed only up to the unused reimbursement amount remaining at the time of retirement or termination, and the account can also stipulate that reimbursements after retirement or termination are reduced by the administrative costs of continuing the coverage.
Medical Reimbursement Plans are incredibly flexible, and companies can choose which eligible expenses they wish to cover. A plan can range from a supplemental dental reimbursement plan to an all-inclusive health benefits plan. An employer can choose from a large list of eligible expenses from the IRS:
- Health Insurance Premiums
- Doctor Visits
- Over the Counter Drugs (Prescription required)
- View Full List of HRA Eligible Expenses
Administration of a Medical Reimbursement Account
While it is possible for an employer to self-administer a Medical Reimbursement Account, this increases the risk of overlooking important compliance obligations and incurring substantial fines. Failure to comply with the following is common and can be costly:
COBRA - Employees experiencing a qualifying event are entitled to continue coverage under the employer's HRA. Employers who fail to comply can be fined up to $110 per day.
HIPAA Privacy - The entity processing claims receives protected health information (PHI), which is protected by HIPAA. Employers who fail to comply can be subject to up to $100 per violation.
Medicare Reporting - Employers are required to provide HRA coverage information to the Centers for Medicare and Medicaid Services (CMS). Employers who fail to comply can be subject to up to $1,000 per day.
Plan Documents - ERISA requires that reimbursement accounts have an established, written plan to define eligible expenses, the amount of employer contribution, and fund rollover. Employers who fail to comply can have enforcement action brought against them.
The safest, most reliable way to manage Medical Reimbursement Account is with HRA Administration software. A good HRA administrator will allow an employer to set up employee classes, eligible expenses and plan documents easily online. Employees should be able to submit claims online, via fax, or mail, and immediately receive acknowledgement of their claim and a link to the claim status. Claims should be processed within 24 hours and reimbusement should be tied to payroll. Using an HRA Administration Software can save an employee many headaches and potential fines.