What is a health expense reimbursement agreement (HRA)?
A health reimbursement agreement (HRA) is an employer-funded plan that reimburses employees for eligible medical expenses and, in some cases, insurance premiums. Employers can claim a tax deduction for reimbursement they make under these plans, and refunds that employees receive are generally tax-free.
How does a health reimbursement agreement (HRA) work?
A health reimbursement agreement is a plan created by an employer to cover his employees' medical costs. The employer decides how much to invest in the plan, and the employee can claim reimbursement for actual health expenses incurred up to that cost. All employees in the same class bracket must receive the same contribution to the HRA.
An HRA is not an account. Employees cannot withdraw funds in advance and use them to pay their medical bills. Instead, they have to pay the expense first and then reimburse it. Refunds at the time of service are probable if the employer provides an HRA debit card. An employee who has exhausted all funds allocated in the HRA before the end of the year will be required to cover subsequent medical expenses out of their pocket or with funds from a Flexible Spending Account (FSA) if available or Health Savings Account (HSA) for employees with a high deductible health plan (HDHP).
Points to Note
An HRA is not transferable; the employee loses this advantage when he leaves the company.
Depending on the type of HRA, the funds can be used to reimburse premiums for health, dental, and eye insurance and eligible medical expenses.
Employers, not employees, fund HRAs.
Government rules, which employers can enforce, determine what expenses can be reimbursed to employees.
Benefits of health expense reimbursement agreements
In 2019, HRAs were used to pay eligible medical bills, including prescription drugs, insulin, meals paid for during treatment at a medical facility, crutches, an annual physical exam, birth control pills, care from a psychologist or psychiatrist, addiction care, transportation costs incurred for medical treatment and more. According to the Obama administration rules, they cannot be used to pay premiums for individual health insurance.
In January 2020, the HRA changed significantly. The government allows employers to offer their employees a new type of HRA, called HRA with individual coverage, instead of group health insurance.
Employees can use these HRAs to purchase their comprehensive health insurance in pre-tax dollars, inside or outside the Affordable Care Act. HRAs with individual coverage can reimburse employees and eligible health care expenses, such as copayments and deductibles.
Under the new rules, employers who continue to provide traditional group health insurance can offer an exceptional HRA benefit to reimburse employees up to $ 1,800 per year in eligible medical expenses. Employees can purchase an "HRA Exceptional Benefit" even if they decline group health insurance coverage but cannot use the funds to purchase comprehensive health insurance. However, they can use the funds to pay for short-term health insurance, dental and eye insurance premiums, and eligible medical bills.
Employees can use HRA money to cover medical, dental, and vision expenses for spouses and dependents.
Limitations of HRA
An HRA only covers eligible medical and dental expenses. According to the IRS, medical bills are expenses incurred to relieve or prevent physical or mental illness and not expenses to maintain general health, such as vitamins.
Expenses that are not considered necessary medical expenses include, for example, maternity clothes, funeral services, teeth whitening, childcare for a healthy child, marriage counseling, gym membership fees, controlled substances, drugs from other countries, and over-the-counter drugs.
An employer can exclude certain medical expenses, even if the IRS qualifies the expenses. The list of reimbursable medical expenses of the employer will be detailed in the employee's HRA document.
HRA compared to other agreements.
An employee who has an FSA and an HRA and has an eligible expense to reimburse by both plans cannot choose which plans will cover the expenses. Instead, you will be reimbursed by the plan that the employer has set up to pay first. Once this plan is depleted, the second plan will cover subsequent eligible medical expenses reported for refunds.
Here's an in-depth look at other options for funding out-of-pocket medical expenses.
HSA
Compared to an HRA, a Health Savings Account (HSA) is a fully earned tax benefit account that is not subject to losses if funds remain in the account at the end of the year. An HSA is linked with a High Deductible Health Plan (HDHP) to pay medical and dental bills. The account is financed by the employer and/or employee and, like an FSA, cannot be used to pay insurance premiums. Unlike HRA and FSA, employees can keep their HSA if they change employers.
FSA
An FSA is funded by a portion of an employee's pre-tax salary, and unlike an HRA, each employee determines how much money should be allocated annually to these agreements. The unused funds from the HRA can be transferred to the following year at the employer's discretion. Unspent FSA funds generally cannot be used in the next plan year, although an employer can offer a short grace period or allow a transfer of up to $ 500.
HRA funding and portability
The healthcare reimbursement agreement is financed exclusively by the employer, deciding on each employee's maximum annual HRA contribution. With the new HRA rules, employers still determine how much to contribute to employee HRAs, except that all workers in the same category of employees must receive the same contribution, as mentioned above.
Any HRA funds not used until the end of the year can be carried over to the next year, although an employer can set a transfer limit that can be carried over from year to year. Also, if an employee is made redundant or leaves the company to work for another company, they will lose their HRA. This differentiates it from an HSA - a health savings account - which is portable.
HRA tax advantages
As a benefit to employers, HRA refunds are 100% tax-deductible. Instead of more expensive retirement plans, the employer can use an HRA to cover retired employees' health costs. Plus, because the plans are fully employer-funded, they provide predictability, allowing employers to anticipate their approximate maximum HRA health benefits for that year.
Employees can use the agreement to pay a wide range of medical bills not covered by their health insurance policies. Also, reimbursements are exempt from taxes up to a maximum amount for a period of coverage. Some companies may offer employees the added benefit of other employer-offered health benefits, such as the FSA, along with an HRA.
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