Overview of Medical Reimbursement Plans

Health insurance costs in the U.S. are rising at an exponential rate. As such, employers are adopting Medical Reimbursement Plans as a strategy to lower the cost of healthcare without reducing coverage for employees.

Medical Reimbursement Resources

How the QSEHRA Works for Employees

In this eBook, we go over exactly how the QSEHRA applies to employees no matter their current insurance situation.

Health Reimbursement Report 2017

Download this report to see charts showing data for industry, family status, region to see if a QSEHRA will work for you.

The Comprehensive Guide to the Small Business HRA

Everything you need to know about the new QSEHRA. Including cost comparisons, case studies, and other tools.

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What are Medical Reimbursement Plans?What_are_medical_reimubursement_plans

Medical Reimbursement Plans are IRS-approved health plans that allow for tax-free reimbursement for medical expenses.

There are a few different types of Medical Reimbursement Plans including: Health Reimbursement Arrangements (HRAs), Healthcare Reimbursement Plans (HRPs), Health Savings Accounts (HSAs), and Health Flexible Spending Accounts (FSAs).

Medical Reimbursement Plans can be used alongside a group health insurance plan. Or, the Medical Reimbursement Plan can be offered as the main health benefit plan, usually instead of a group health insurance plan. Because the reimbursements occur pre-tax, employees and employers often save up to 50% in combined taxes on the cost of medical expenses.

The sections outlined on our navigation bar provide more information about the types of Medical Reimbursement Plans available, and how they are used.

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Different Approaches to Medical Reimbursement Plans

In this section, we’ve outlined four different approaches with Medical Reimbursement Plans, and how they compare to each other.

Four Main Types of Medical Reimbursement Plans

There are four main types of Medical Reimbursement Plans:

Health Savings Accounts (HSAs)

HSAs are individual bank accounts owned by employees that allow for tax-free payment or reimbursement of eligible medical expenses. An employer usually offers an HSA-qualified high-deductible health plan and an HSA.

Health Reimbursement Arrangements (HRAs)

HRAs are employer-funded, tax advantaged employer health benefit plans used to reimburse employees for eligible medical expenses.

  • With an “Integrated HRA,” the HRA is paired with a high-deductible health insurance plan to reimburse employees for their deductible expenses.
  • With a “Stand-alone HRA,” the HRA is used to reimburse employees for eligible individual health insurance premiums and medical expenses. As of 2014, however, health reform has placed limitations on the use of Stand-alone HRAs for most employers. Types of stand-alone HRAs that are compliant under health reform include Retiree HRAs and One-Person Stand-alone HRAs.

HRAs are also called Health Reimbursement Accounts.

Healthcare Reimbursement Plans (HRPs)

HRPs are employer-funded, tax advantaged employer health benefit plans used to reimburse eligible employees for individual health insurance premiums and preventive care.

HRPs are specifically designed to comply with new Affordable Care Act rules and regulations.

HRPs are offered instead of a group health insurance plan. This type of approach is sometimes referred to as a "pure" defined contribution health plan.

HRPs are also sometimes referred to as “Section 105 Medical Reimbursement Plans,” “Self-Insured Medical Reimbursement Plans,” or “Premium Reimbursement Arrangements.”

Health Flexible Spending Accounts (FSAs)

Health FSAs are employer-established benefit plans that allow for tax-free reimbursement of qualified medical expenses.

Medical Reimbursement Plans Comparison Chart

The chart below summarizes and compares the four main types of Medical Reimbursement Accounts.

  Health Savings Account (HSA) Health Reimbursement Arrangement (HRA) Healthcare Reimbursement Plan (HRP) Health Flexible Spending Account (FSA)
Legal Authority Medicare Prescription Drug, Improvement, & Modernization Act of 2003, and supplemental guidance from the IRS. IRS Guidance 2002-45 and IRS Code Section 105. IRS Code Section 105. IRS Code Section 125.
Who May Contribute Employer, employee, or third party. Employer only. Employer only. Employee and employer.
Cost of Employer Contributions 100% paid regardless of utilization. Only pay for employee utilization (typically 25-50%). Only pay for employee utilization (typically 25-50%). 100% paid regardless of utilization.
Maximum Annual Contribution $3,350 / single * $6,650 / family * *2015 Determined by employer; no statutory limit. Determined by employer; no statutory limit. Determined by employer, capped at $2,500 per employee (2014), with annual inflation increases.
Tax Treatment Tax-free. Tax-free. Tax-free. Tax-free.
Eligibility Requirements Must have HSA-qualified high-deductible health plan ($1,300+ single / $2,600+ family deductible in 2015). All employees and former employees as determined by employer, not self-employed. All employees and former employees as determined by employer, not self-employed. All employees, not self-employed.
Purchase of Health Insurance Plan Required? Yes.Purchase of HSA-qualified high deductible health plan required. No.Employer can require participation in company group health insurance plan to be eligible for the HRA. No.Employer can require proof of health insurance to be eligible for the HRP. No.
Medical Expenses Allowed Unreimbursed medical care expenses as defined by IRC 213(d), and insurance premiums for unemployed individuals.No employer limitations. Unreimbursed medical care expenses as defined by IRC 213(d); including health insurance premiums.Employer can limit categories of IRS-approved expenses.Eligible expenses outlined in Plan Documents. Unreimbursed medical care expenses as defined by IRC 213(d); including health insurance premiums.To comply with the Affordable Care Act, HRPs are designed to only allow reimbursement of eligible health insurance premiums and basic preventive services. Unreimbursed medical care expenses as defined by IRC 213(d); no health insurance premiums.
Funds Carried Over to Next Year? Yes. Determined by the employer. No. Determined by the employer; $500 maximum.
Administrator Employee. Employer or third party administrator (TPA). Employer or third party administrator (TPA). Employer or third party administrator (TPA).
Portable After Termination? Yes.Continued access to unused account balance if employee is no longer working for the employer.Withdrawals for non-medical purposes are subject to income tax and a 20% penalty tax.Once account holder reaches age 65 (Medicare eligibility age), becomes disabled, or dies, withdrawals for non-medical purposes are subject to income tax only, with no penalty. Determined by the employer. Determined by the employer. No.Account cannot be maintained if the employee is no longer working for the employer.

 

Frequently Asked Questions about Medical Reimbursement Plans

How Do We Administer a Medical Reimbursement Plan?Medical_reimbursement_plans_questions

Most companies partner with a Medical Reimbursement Software company or third party administrator to set up and administer the health plan.

Who May Contribute to Medical Reimbursement Plans?

Who may contribute to a Medical Reimbursement Plan depends on the type of plan offered. With an HSA, anyone may contribute. With an HRA or HRP, only the employer may contribute. With an FSA, the employee or employer may contribute.

Are Medical Reimbursement Plans Tax-Free?

Yes, if an employer sets up a formal Medical Reimbursement Plan (such as an HSA, HRA, HRP, or FSA), the contributions are generally tax-deductible to the business, and reimbursements are generally tax-free to employees. Note: Tax benefits may be limited for some business owners.

How Does Health Reform Impact Medical Reimbursement Plans?

The Affordable Care Act (known as ACA, ObamaCare, or health reform) was signed into law in 2010 and impacts many areas of health care and health, including Medical Reimbursement Plans such as HRAs, HRPs, HSAs, and FSAs. To summarize:

  • As of 2011, over-the-counter (OTC) medications are no longer eligible for reimbursement from a Flexible Spending Account (FSA), Health Savings Account (HSA), or Health Reimbursement Arrangement (HRA), unless obtained with a prescription (except for insulin).

  • As of 2011, the excise tax for non-qualified HSA withdrawals doubled from 10% to 20%.

  • As of 2013, Health FSA employee salary reduction contributions limited to $2,500 per plan year, with future increases to allow for inflation.

  • As of 2014, Stand-alone HRAs with two or more participants are generally not compliant.

  • As of 2014, employers using an HRP to reimburse employees for individual health insurance must ensure the plan complies with the new ACA “Market Reforms.”

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

Additional Reading on Medical Reimbursement Plans

Section 105 Medical Reimbursement Plans

Section 105 of the IRS code allows small business owners to pay for medical expenses tax-free. With a Section 105 medical reimbursement plan, an employer can reimburse an employee for medical and insurance expenses. These can be expenses incurred by the employee or his or her dependents, but they must be allowed under the plan document, which is created by the employer and outlines the expenses eligible for reimbursement. Read more

What is a Medical Expense Reimbursement Plan (MERP)?

A lot of new health benefits plans have become available to employers in the last few years. Many employers are particularly interested in MERPs or "Medical Expense Reimbursement Plans". This article provides an overview of MERPs. Read more

HRAs, HSAs and FSAs in 2014 - Changes Under Health Reform

The Affordable Care Act (known as ACA, ObamaCare, or health reform) was signed into law in 2010 and impacts many areas of health care and health insurance, including medical reimbursement programs such as HRAs, HSAs, and FSAs. This article provides more information about how HRAs, HSAs, and FSAs are impacted by health reform. Read more

The Comprehensive Guide to the Small Business HRA