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We've updated one of our most popular materials. See what's new in our guide to MERPs.

A Guide to Health Reimbursement Accounts

Frequently Asked Questions about Health Reimbursement Accounts

This section answers frequently asked questions (FAQs) on Health Reimbursement Accounts.

What is a Health Reimbursement Account?Health_reimbursement_accounts_questions

A Health Reimbursement Account (HRA) is an IRS-approved, employer-funded, tax-advantaged plan that reimburses employees for eligible out-of-pocket medical expenses, including individual health insurance premiums.

HRAs are one of several programs authorized by the Internal Revenue Service (IRS) that give individuals tax advantages to offset health care costs.

What is the difference between a Health Reimbursement Account and a Health Savings Account (HSA) or Flexible Spending Account (FSA)?

An HRA, HSA, and FSA are all IRS-approved plans where distributions are used to pay for qualified medical expenses on a pre-tax basis. However, there are some key differences:

HRA: An HRA is a notional account funded solely by the employer. Employees may not contribute. Contributions are not included in employees' income.  Employers pay only after their employees incur eligible medical expenses.  

HSA:  An HSA is a financial account and can be funded by the employer and/or the employee, as well as any other person (such as a family member). Contributions, other than employer contributions, are deductible on the eligible individual’s tax return whether or not the individual itemizes deductions. Employer contributions are not included in income.

FSA: An FSA can be funded by the employer and/or the employee, though usually it is funded primarily by the employee.

For a detailed comparison chart, see this section on Medical Reimbursement Plans. 

Why would an employer offer a Health Reimbursement Account?

An HRA allows companies to offer flexible benefits, providing a way for a company to offer more affordable health insurance or as an alternative to group health insurance. HRAs offer certain advantages:

  • Flexibility

  • Cost Control

  • Cost Savings

  • Recruiting & Retention

Read more: Health Reimbursement Account Pros and Cons

How many Health Reimbursement Accounts have been established?

While the total number of HRAs is not available as a single number, according to the Employee Benefit Research Institute the total number of HRAs and HSAs combined in 2012 was 11.6 million, up from 1.3 million in 2006. Assets in HRAs and HSAs in 2012 were $17 billion, up from $873 million in 2006.

How do Health Reimbursement Accounts work?

Employers choose the amount of HRA allowances to provide to employees (monthly or annual allowances). These funds are notional, and available to reimburse individuals for eligible health care expenses. When the employer sets up the HRA, they decide what categories of medical expenses to reimburse and other rules of the plan. Once employees incur an eligible medical expense, they submit a reimbursement request and, once approved, are reimbursed by the employer tax-free.

What are critical underwriting or participation requirements?

With an HRA, there is no underwriting and no participation requirements. HRA administration fees are typically based on the size of the company and plan participation.

The HRA plan must meet basic IRC Section 105 non-discrimination requirements to obtain favorable tax treatment. Benefits may be tiered according to single vs. family coverage, or based on bona-fide job criteria such as years of service, location, job description, or employee status (ex: active vs. retired).

Are there minimum and maximum amounts of funding for Health Reimbursement Accounts?

Currently there are no annual minimum or maximum limits on HRA plan funding.

What medical expenses can Health Reimbursement Accounts funds be used for?

IRC Section 213(d) sets which medical expenses are reimbursable through an HRA. Within this list, employers can restrict categories of expenses.

Can employees have an HRA and an HSA or FSA?

Yes.  All three programs can exist alongside one another, but employers must be careful about how they work together.  For example, with both an HSA and FSA there are special ordering ("coordination") rules to consider.

Can an Owner Participate in Health Reimbursement Accounts?

Yes. However, whether or not owners can receive HRA reimbursements 100% tax free depends on how the company files, and the owner's status.

C-Corporation Owners: C-Corp owners may participate in an HRA and receive all HRA reimbursements 100% tax-free.

Sole Proprietors, Partners, or S-Corp shareholders that own >2% of the company's shares:  These Non-C-Corp owners can use the HRA platform to reimburse and track medical expenses. However, HRA reimbursements must be reported on the owners'/partners' wages (on their W-2 and 1040 forms) and are subject to federal income taxes.

Can 1099 Contractors Participate in Health Reimbursement Accounts?

Technically, the answer is no. However, many businesses use HRA Software to offer health benefits to 1099 contractors. The primary difference is that, unlike W-2 employees, 1099 contractors must report all HRA reimbursements as income on their personal tax return.

Do you have additional questions about Health Reimbursement Accounts? Contact us. We'd be happy to help.

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