This section answers frequently asked questions (FAQs) on Health Reimbursement Accounts.
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.
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.
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:
Recruiting & Retention
Read more: Health Reimbursement Account Pros and Cons
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.
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.
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).
Currently there are no annual minimum or maximum limits on HRA plan funding.
IRC Section 213(d) sets which medical expenses are reimbursable through an HRA. Within this list, employers can restrict categories of expenses.
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.
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.
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.