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:
An HRA is paid for solely by the employer and cannot be funded through employee salary deduction.
An HRA may only reimburse employees during their effective dates in the HRA plan.
An HRA can reimburse for eligible medical expenses and health insurance premium amounts, as defined in IRC Section 213(d)(1)(D).
Each eligible medical expense must be substantiated.
Reimbursements are generally excludable from the employee's gross income under Internal Revenue Code Sections 106 and 105.
HRAs are considered group health plans, and as such, must be designed and administered to comply with the IRS, HIPAA, ERISA, COBRA, and the ACA. For more on Health Reimbursement Account compliance, click here.
HRA Plan Documents are required.
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:
First, the employer would purchase a high deductible health plan to achieve savings with lower premiums (for example, switch from a $500 deductible to a $2,500 deductible).
Second, the employer would offer an Integrated HRA to cover the difference between the old and new deductible (in this example, $2,000 annually).
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.
To summarize, generally with an integrated HRA:
A high-deductible health plan (HDHP) is offered.
The integrated HRA reimburses out-of-pocket medical expenses, often just deductible/co-insurance expenses related to the HDHP.
Allowances are given annually, and there is generally no rollover of unused funds year to year.
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.
Note: Because of changes with health reform, 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.
To summarize, generally with a stand-alone HRA:
No group health insurance plan is offered.
The HRA reimburses individual health insurance premiums, and other out-of-pocket medical expenses.
Allowances are given monthly and often there is some rollover of unused funds year to year.
Because of changes with health reform (specifically annual limit prohibitions), stand-alone HRAs are no longer a compliant option for many employers.
Stand-alone HRAs are a compliant option for retiree benefits and one-person plans, which we’ll discuss next.
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.