A health reimbursement arrangement (HRA) allows employers to fund employee health care coverage without having to administer a complicated and expensive health plan. Both businesses and employees can receive tax benefits from this arrangement.
What Is a Health Reimbursement Arrangement (HRA)?
A health reimbursement arrangement plan is set up by employers to reimburse employees for their medical expenses. It also allows unused amounts to be carried forward. The employer administers the plan, which allows employees, their spouses, and their dependent children up to age 27 to use the HRA funds tax-free to pay for medical expenses.
- Alternate name: Health reimbursement account
- Acronym: HRA
You may also see HRAs called “health reimbursement accounts” because the employees have individual reimbursement accounts.
How Does a Health Reimbursement Arrangement (HRA) Work?
The employer sets up a plan according to IRS regulations and puts money in individual employee reimbursement accounts, up to a maximum amount each year. The employee is reimbursed when they have verified that the expense is on a list of qualified medical expenses.
For example, if an employee has paid a bill for an X-ray, they can request reimbursement for the amount they paid. Any funds remaining in the employee’s HRA account at the end of the year are rolled over to the following year, when they can be used along with the contributions for that next year.
Your company (as the employer) can set up the requirements for employee participation. For example, you can allow reimbursements from the HRA to:
- Current employees and retirees
- Employee spouses and dependents under age 27
- Spouses and dependents of deceased employees
As part of your plan setup, you must have a method to verify reimbursements to make sure they are for qualified medical expenses. You can give employees a debit card, credit card, or stored value card for reimbursements, but they must be able to have a way to show that the reimbursements are for qualified medical expenses.
HRAs, like all other employee benefit plans, must be offered on the same terms to all employees in a specific class. The plan must also not favor S corporation shareholders or highly compensated employees.
Covered Medical Expenses
According to the IRS, employees can use an HRA to pay for the cost of “diagnosis, cure, mitigation, treatment, or prevention of disease, for any part or function of the body.” Covered expenses don’t include expenses for the general health of the person.
Some of the most common qualified expenses include insurance premiums, dental treatment, and eye care. Long-term care coverage is also included, up to a maximum, depending on the age of the insured. You can decide which benefits to include in your company’s HRA plan.
You can see the list of qualified medical expenses (and expenses that are not qualified) in IRS Publication 502: Medical and Dental Expenses.
Tax Benefits of HRAs
HRAs are health plans, and the IRS classifies them as employee benefit programs. This means your contributions as an employer to employee HRAs are tax-deductible expenses for your business. In addition, your contributions to the HRA are considered fringe benefits to employees, and the IRS says you may be able to exclude all or part of their value from the employee’s taxable income. In addition, you as the employer don’t owe employment taxes on these contributions.
Types of Health Reimbursement Arrangements
In addition to traditional HRAs, your business can choose from three other HRA versions to give health care coverage to employees without the burden of administering an employer-sponsored health care plan.
Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)
Your small business may be able to set up a special kind of HRA called a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). The plan is specifically designed for small businesses with fewer than 50 full-time employees that can’t afford to give employees health insurance.
As with a traditional HRA, the employer contributes an amount each year to employee accounts, and the employees must use this amount to reimburse themselves for health insurance premiums or medical expenses incurred by them or their family members. Employees may not make their own contributions to a QSEHRA.
For 2021, the maximum reimbursement amount is $5,300 for individuals and $10,700 for families.
Individual Coverage HRA
Another type of HRA, called an Individual Coverage HRA, allows employers of any size to reimburse employee premiums for individual health insurance. This type of HRA was first offered in 2020.
Your contributions as an employer are not limited, and employees can roll over unused amounts to the next year. Employees can use the money in their Individual Coverage HRA only if they are enrolled in an individual health insurance plan, including one purchased from a state or federal marketplace or exchange, or in Medicare. The plan can not be short-term, limited-duration insurance (STLDI).
You can offer reimbursement amounts to all employees or only employees in certain classes, such as full-time employees or those in a particular geographic region. The terms you offer must be the same for all members of a class of employees. However, you may provide more money to employees who are older or who have more dependents.
Offering employees this Individual Coverage HRA may count as coverage if you are a large employer under the requirements of the ACA employer mandate. This part of the regulation is complicated, so check with your tax professional.
Excepted Benefit HRA
Your business has another HRA option called an Excepted Benefit HRA to cover specific additional benefits to employees. It also was first offered in 2020.
An Excepted Benefit HRA covers expenses not covered under primary health care plans, like co-pays and deductibles. You might want to consider this option if your company already has a traditional group health plan.
Employees may enroll in an Excepted Benefit HRA even if they don’t enroll in your traditional group health plan.
This arrangement requires an annual maximum employer contribution of $1,800 a year, indexed for inflation starting in 2021, when the contribution limit remains $1,800. The money can’t be used to reimburse individual health insurance premiums, group health plan premiums (other than COBRA coverage for terminated employees), or Medicare premiums. However, it can be used to pay for dental, vision, or STLDI premiums.
|QSEHRA||Individual Coverage HRA||Excepted Benefit HRA|
|Employer Size||Less than 50 employees who aren't offered a group health plan||Any size, with at least one employee (not counting certain owners or their spouses)||Any size|
|Employee Requirements||Must have minimum essential coverage required by the Affordable Care Act||Must have individual health insurance coverage, including private insurance or a plan through HealthCare.gov||Employers must offer a traditional health plan, but employees aren’t required to enroll|
|Maximum Annual Contribution for 2021||$5,300 for individuals and $10,700 for families||No maximum, but employers must offer this HRA on the same terms to all employees in each class||$1,800|
Alternatives to HRAs
A Flexible Spending Arrangement, or Flexible Spending Account (FSA), is another type of employer-based benefit arrangement that reimburses employees for medical expenses. Employees can take pre-tax funds from their paychecks to use for specific medical expenses. Your company can also contribute to the FSA and get a tax deduction.
Each year, the IRS designates a specific maximum for voluntary salary reduction; it's $2,750 in 2021. If the FSA permits carryovers of money to the following year, the maximum amount for 2021 is $550. FSAs can also allow participants a grace period of 2.5 months after the end of the plan year to spend unused funds.
HRAs and FSAs are not available to self-employed individuals, and funds in HRAs and FSAs can’t be transferred to another employer.
One of the advantages of an FSA is that the employee can get reimbursed for expenses even if they haven’t made their full contribution for that year. For example, an employee may contribute a specific amount from each paycheck during the year, but the full contribution amount is available to them on January 1 of that year.
In 2021, the federal government granted employers the ability to allow plan participants to carry over all unused funds from 2020 and 2021 FSA plan years to 2021 and 2022 because of the pandemic. They may also extend the permissible period for incurring claims for FSA plan years ending in 2020 and 2021, permit post-termination reimbursements for FSA plans, and allow mid-year election changes for FSA plans during plan years ending in 2021.
HRAs vs. FSAs
|Health Reimbursement Arrangement (HRA)||Flexible Spending Arrangement (FSA)|
|Only employers contribute to this plan||Both employees and employers can contribute voluntarily|
|No limit on employer contributions||Employee pre-tax contributions are limited to $2,750 for 2021, and there’s no limit on employer contributions|
|Unused amounts at year-end are rolled over to increase the next year’s amount||Unused amounts at year-end may be forfeited, depending on what employer permits|
|Funds can be used for health insurance premiums and other specific costs not covered by primary health plans||Funds can be used for specific short-term health expenses, though not insurance premiums|
Because of the pandemic, FSAs and HRAs may reimburse expenses for menstrual care products and over-the-counter drugs without prescriptions incurred for any time period beginning on or after Jan. 1, 2020.
How to Set Up a Health Reimbursement Arrangement (HRA)
The best way to set up a plan is to hire a benefit plan administrator—someone who is responsible for running employee benefit plans. The administrator can help you prepare the documents you need, find a financial institution to manage the employee accounts, and send information to employees.
- Employers can set up and fund one of several health reimbursement arrangements (HRAs) that reimburse employees for qualified medical expenses.
- Employees may roll over unused reimbursements to the next year.
- Employers can take a tax deduction for HRA contributions if they meet specific IRS requirements.
- Employees don’t have to pay taxes on employer HRA contributions for IRS-approved plans.
- Several types of HRAs are available, depending on the specific needs of your business.
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