When evaluating Health Reimbursement Accounts, there are both pros and cons to consider for your business and employees. In this section we’ve outlined pros and cons of Health Reimbursement Accounts.
The four main pros of Health Reimbursement Accounts (HRAs) are: flexibility, control, cost/tax savings, and employee recruiting and retention.
The two main cons of Health Reimbursement Accounts (HRAs) are: a change in benefits administration and limited tax benefits for some owners.
This section provides an overview of Health Reimbursement Accounts (HRAs) rules and the four main ways HRAs are used today.
To understand how HRAs are used, it is first important to understand the basic HRA rules. The Internal Revenue Service (IRS) defines the rules and guidelines for an HRA in IRS Notice 2002-45. Under these rules:
Given these rules, HRAs are used in four main ways. Below we’ve outlined these ways including how each main type may be used today.
An Integrated HRA (often called a deductible-only HRA, a linked HRA, or a GroupHRA) is an HRA paired with a high deductible group health insurance plan. The Integrated HRA is a supplement to help with deductible costs, and is only offered to those at the company who enroll in the group health insurance plan.
With an Integrated HRA, usually a company has a group health insurance plan already in place, but is looking to lower the cost while keeping employee's coverage (risk) the same. For example:
With an Integrated HRA, insurance premiums are not reimbursable because the employer is already providing an insurance plan. However, an employer can decide what other types of eligible expenses they would like to reimburse (within the IRS guidelines). It's common for Integrated HRAs to only reimburse deductible or co-insurance expenses also covered under the group health insurance plan. An Explanation of Benefits (EOB) is typically required with each reimbursement request.
A stand-alone HRA is not linked to a group health insurance plan. The HRA is generally designed to reimburse employees for personal health insurance premiums and out-of-pocket medical expenses.
A Retiree HRA is designed to reimburse employees only after retirement. A Retiree HRA can be designed to reimburse employees for personal health insurance premiums and out-of-pocket medical expenses.
For example, an employer may offer a Retiree HRA as an alternative to participation in a group health insurance plan.
A one-person Stand-alone HRA is a Stand-alone HRA with only one participant. One-person Stand-alone HRAs can be designed to reimburse employees for personal health insurance premiums and out-of-pocket medical expenses.
This type of HRA is popular with C-Corp owners, one-person nonprofits and churches, and entrepreneurs.
As discussed previously in the section on Use Cases, there are many different ways to use Health Reimbursement Accounts, as long as they follow Health Reimbursement Account rules.
In this section we will cover design requirements for Health Reimbursement Accounts (HRAs).
Designing a Health Reimbursement Account
To design a Health Reimbursement Account, ask these questions:
What type of HRA are we using? (See: Health Reimbursment Account Use Cases)
When will the HRA plan start?
What HRA allowance will we provide, and at what frequency (annually or monthly)? Will we provide the same allowance to all employees, or offer different allowances based on employee class or family status?
What makes employees eligible for the benefit?
What categories of medical expenses will we reimburse?
What happens to unused HRA funds at the end of the plan year?
Will the HRA have a deductible or co-insurance?
Who will administer the HRA?
Do we understand the compliance rules with the HRA?
Health Reimbursement Account Compliance Requirements
Health Reimbursement Accounts (HRAs) are Section 105 group health plans. As such, they must comply with IRS rules, HIPAA, COBRA, ERISA, and the Affordable Care Act (ACA). This section outlines these compliance requirements.
Internal Revenue System (IRS) Rules
Plan Documents: The IRS requires that written Plan Documents are established and maintained. Plan Documents define what expenses are eligible for reimbursement, the amount of employer contribution, and other required details about the reimbursement plan.
Documentation: The IRS requires that employees submit proper documentation verifying their claim for reimbursement, and that supporting documentation is saved on file for ten years.
Non-Discrimination: HRAs must comply with IRS nondiscrimination rules. The rules state the plan must not discriminate in favor of highly compensated individuals (HCIs) with respect to eligibility to participate in the plan or benefits provided under the plan.
Health Insurance Portability and Accountability Act (HIPAA)
Consolidated Omnibus Budget Reconciliation Act (COBRA)
Only for plans with 20 or more participants
Employee Retirement Income Security Act (ERISA)
Summary Plan Description: HRAs are employee welfare plans under ERISA. ERISA requires every [welfare] plan to have a Summary Plan Description (SPD) and to furnish copies to each participant.
ERISA Compliance: The U.S. federal government has specific regulations employers must comply with in order to reimburse employees for individual health insurance premiums without triggering ERISA plan status for the individual health insurance policies. For example, the employer must not endorse specific individual health insurance policies or pay directly for them.
The Patient Protection and Affordable Care Act (ACA)
Annual Limit Compliance: Section 2711 of the Public Health Service Act, as added by the Patient Protection and Affordable Care Act (ACA), generally prohibits group health insurance plans from placing lifetime and annual limits on the dollar value of "essential health benefits." HRAs are a type of account-based group health plan and by definition, an HRA imposes annual limits on essential health benefits. That is, reimbursements an HRA participant may receive during a year are limited to the balance of his or her notional HRA account. How this provision affects HRAs depends on the type of HRA offered.
Integrated HRAs are generally compliant, as long as the HRA is integrated with group coverage and the group health insurance complies with annual and lifetime limit prohibitions.
Stand-alone HRAs (with two or more participants starting on or after January 1, 2014) are generally not compliant. Employers who want to provide individual health insurance reimbursement to more than one participant may set up a compliant Healthcare Reimbursement Plan or HRP.
Retiree HRAs are compliant, as they are exempt from the annual limit prohibitions.
One-person stand-alone HRAs are compliant, as the annual limit prohibitions only apply to plans with two or more participants.
Preventive Care Compliance: Section 2713 of the PHS Act, as added by the ACA, requires group health plans (including most HRAs) to cover basic preventive health services without cost-sharing.
90-Day Waiting Period Compliance: The ACA prohibits waiting periods over 90 days for eligible employees.
Internal and External Claims Appeal Process: The ACA added new requirements to the internal and external appeal process including how and when procedures are communicated to plan participants.
Dependent Coverage for Adult Children up to Age 26: Section 2714 of the PHS Act, as added by the ACA, provides that group health plans (including HRAs) that make available dependent coverage of children must make such coverage available for children until 26 years of age.
Uniform Explanation of Coverage and Definitions: The ACA requires that group health plans, participants, and beneficiaries receive a standardized summary of benefits and coverage (“SBC”) and a set of uniform definitions (“Uniform Glossary”), both of which must conform to requirements outlined in the ACA and existing regulations.
Form 720 Comparative Effectiveness Research (CER) Fee: The ACA includes a "research fee" that plan sponsors must pay on an annual basis annually via Form 720.
60-Day Notice of Material Modification: The ACA requires employers to provide 60 days advanced notice to participants when making material modifications to their group health plan(including self-insured medical reimbursement plans).
How to Make Compliance Easy
To make sure your Health Reimbursement Account complies with these rules and regulations, and to make compliance easy, use HRA Administration Software.
Implementation Strategies When Creating a Health Reimbursement Account
This section outlines Health Reimbursement Account (HRA) implementation strategies.
How to Implement a Health Reimbursement Account
There are six steps to consider as you, and employer, implement a Health Reimbursement Account (HRA):
Step 1 - Decide who will administer the HRA (ex: use HRA Software, a third-party administrator, or self-administer).
Step 2 - Set employee eligibility requirements, decide what expenses are eligible for reimbursement, and determine the monthly or annual HRA contribution amounts.
Step 3 - Enroll eligible employees and distribute all required plan documents to each eligible employee.
Step 4 - Employees incur qualified medical expenses and submit proper documentation for reimbursement.
Step 5 - A HIPAA-compliant claims processor reviews the reimbursement request and approves or rejects the request. (Tip: Unlike with an HSA, the IRS requires employees to submit written documentation for all eligible medical expenses before they are reimbursed from the HRA. However, because of HIPAA and other privacy concerns, virtually all companies use a third-party to handle verification of medical expenses and/or reimbursement to employees.)
Step 6 - If the request is approved, the employer reimburses the employee for the approved reimbursement, up to the balance of each employee's HRA.
How to Administer a Health Reimbursement Account
To administer a Health Reimbursement Account (HRA), you need to:
Have legal HRA Plan Documents in place, and
Have safeguards in place to stay compliant with the IRS, ERISA, HIPAA, and the ACA.
Because of these compliance reasons, and for ease of use and time savings, most businesses use a third party to administer the HRA. Businesses have three main options for HRA administration: a traditional third party administrator ("TPA"), an HRA Software provider, or self-administration.
A Traditional TPA will help a business: set up the HRA, create and distribute HRA plan documents, manage all HRA funds, review claims for reimbursement, keep medical receipts on file, and issue reimbursements to employees. Traditional TPAs require pre-funding of the HRA allowances.
An HRA Software provider helps a business: set up the HRA, create and distribute HRA plans electronically, provide a "quickbooks-like" tracking of HRA funds, review claims for reimbursement, keep medical receipts on file electronically, and notify the employer (through the software) when to reimburse employees via payroll. HRA Software does not require pre-funding of HRA allowances, and is not a fiduciary.
Self-Administration: Technically, a business can self-administer its own HRA, but failure to comply with the minimum HRA federal administration requirements is common without utilizing proper HRA Software or a TPA. Businesses that self-administer are frequently out of compliance with IRS, ERISA, HIPAA, COBRA, and ACA regulations, and businesses can face costly fines for being out of compliance. And, if a business puts into place all of the safeguards needed for compliance, the administrative cost likely outweighs the benefits of the HRA.
In the next section, we’ll cover more about HRA Administration Software.
Administration Software for a Health Reimbursement Account
Health Reimbursement Account Administration Software provides companies with:
This section outlines 13 features to look for with Health Reimbursement Account (HRA) Administration Software.
(1) Automated compliance and software updates
Your administration tool should keep your benefit plan up to date and compliant with applicable rules and regulations by including, at minimum, the following:
- A legal plan document and SPD
- Collection and storage of electronic enrollment signatures
- Verification and compliance with HIPAA privacy laws
- ERISA compliance
- Proof of minimum essential coverage
- Internal and external documentation appeal process
- Dependent coverage for adult children up to age 26
- Notice automation as required
(2) Online administrative access
Your company should be able to manage the entire HRA online. The cloud-based software should allow your plan administrator to easily add and remove employees, modify plan rules, record reimbursements, and access reporting tools.
(3) Real-time accounting
Your administration tool should automatically keep track of monthly allowances, verified expenses, reimbursements, and balances. It should provide real-time access to accounting details, including total allowances, total reimbursements, and outstanding liability to the company in aggregate and on an employee-by-employee basis.
(4) Streamlined employee enrollment
Your administration tool should allow for easy employee management. It should automatically email a welcome letter and other plan administration information. For terminated employees, the system should automatically track a run-out period and notify the employee they’ve been removed.
(5) Employee reimbursement and record-keeping
Your administration tool should allow the plan administrator to record reimbursements individually or on a periodic batch basis. Reimbursements are paid via check or payroll. The system should leave a well-organized and permanently available audit trail. Additionally, it should send email notifications to employees when their reimbursement request is approved, and again confirming when (and how) it will be reimbursed.
(6) Automated renewals
One of the benefits of an HRA is eliminating the labor-intensive annual renewal process of traditional group policies. Your administration tool should allow you to automatically renew online. There should be no paperwork required and no renewal fees. The process should be quick and easy for the plan administrator, and it should not affect employees.
(7) Online access and balance tracking for employees
Your administration tool should provide each employee with secure online access to view their allowances and expenses and to request reimbursements. It should also provide access to the required plan documents.
(8) Employee welcome letters
When employees are added to the HRA, your administration tool should automatically customize and distribute employee welcome letters. These welcome letters instruct employees on how to use the HRA.
(9) Access to a health benefits advisor
Your administration tool should provide employees with online access to individual health insurance resources. You should have the option of directing employees to a health insurance broker or a website for health insurance information. The software should not restrict employees from purchasing individual coverage from any source, whether through a broker, through the health insurance Marketplace, or directly from an insurance company. Look for an administration tool that helps employees shop for and purchase individual health insurance policies, ideally directing employees to a designated broker or online comparison site for quotes.
(10) HSA compatibility
Your administration tool should be compatible with health savings accounts (HSAs), allowing employees to contribute to an HSA while participating in your HRA. Even better, your administration tool should have relationships with top HSA providers to help employees open an HSA.
(11) Easy reimbursement requests
Your administration tool should allow employees to request reimbursement online and immediately acknowledge their request and provide a link to monitor request status. The software should have all documentation permanently available for convenient employee access.
(12) Fast reimbursement request review service
Your administration tool should provide an independent service to review employee reimbursement requests and provide a recommendation to the plan administrator within one business day. Employees should be able to inquire about their request online, through email, or by telephone. Employees receive an email with information on perfecting a reimbursement request if the submitted documents do not match the request.
(13) Reimbursement of large expenses over time
Your administration tool should make it easy for employees to track reimbursement requests and balances. If an employee's reimbursement request exceeds his or her balance, the software should not reject it. Rather, employees should continue to receive partial reimbursements until the entire expense has been reimbursed.
Frequently Asked Questions about Health Reimbursement Accounts
This section answers frequently asked questions (FAQs) on Health Reimbursement Accounts.
What is a Health Reimbursement Account?
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:
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.
Additional Reading on Health Reimbursement Accounts
HRAs in 2015 - What All Employers Need to Know
In the past, Health Reimbursement Accounts (HRAs) were a popular vehicle used by small businesses to reimburse employees tax-free for individual health insurance premiums and out-of-pocket medical expenses. However, health reform brought sweeping changes to the health insurance industry, including how employers can use HRAs. >> Read more.
How to Make a Stand Alone HRA Work for Your Business
Stand-alone Health Reimbursement Arrangements (HRAs) can be somewhat confusing. And if you own a small business, you might be wondering what they are and how they work. This article breaks down Stand-alone HRAs, more specifically one-person Stand-alone HRAs, to provide a thorough understanding of how Stand-alone HRAs work in 2015 and beyond. >> Read more.
10 HRA FAQs - Health Reimbursement Account Rules
This article provides ten frequently asked questions on Health Reimbursement Accounts. >> Read more.
Who Can Administer a Health Reimbursement Account (HRA)?
Health Reimbursement Accounts are growing in popularity because they allow businesses to provide health benefits at an affordable cost. A common question is "who can administer the Health Reimbursement Account?" This article examines the rules of HRAs and who can administer the HRA in a compliant way. >> Read more.
Health Reimbursement Account (HRA) Eligibility FAQs
This article answers frequently asked questions (FAQs) about HRA Eligibility. >> Read more.