• HRAs consists of funds solely set aside by an employer to reimburse employees (and other family members) for qualified medical expenses incurred by the employee or family members.
• “Individual Coverage HRAs” and “Excepted benefit HRAs” are alternatives to traditional employer group health plan coverage and reimburse medical expenses, like monthly premiums, copayments, and deductibles.
• For certain types of HRAs, the employee (and other family members) must be enrolled in a health plan to use the HRA money.

Health reimbursement arrangements (HRAs), also known as “health reimbursement accounts” or “personal care accounts,” are a type of health insurance plan that reimburses employees for qualified medical expenses. HRAs consist of funds set aside by employers to reimburse employees, tax free, for qualified medical expenses, just as an insurance plan will reimburse covered individuals for the cost of services incurred. Qualified medical expenses are those specified in the plan that would generally qualify for the medical and dental expenses deduction.

An HRA is an arrangement that:

• Is financed or paid for solely by the employer.
• Is not provided pursuant to an employee salary reduction election or under a cafeteria plan.
• Employer contributions are not included in the employee’s income. The employee does not pay federal income taxes or employment taxes on amounts the employer contributes to the HRA.
• There is no legal limit on the amount of employer contributions. Of course, contributions should be consistent to avoid any discrimination claims.

HRAs: 3 things to know

1. An HRA isn’t traditional health coverage through a job — The employer contributes a certain amount to the HRA. The employee uses the money to pay for qualifying medical expenses. For some types of HRAs (such as “Individual Coverage HRAs”and “Qualified Small Employer HRAs”), the employee can also use the money to pay monthly premiums for a health plan.
2. An employee may need health coverage to use the HRA — For certain types of HRAs, the employee (and possibly other family members) must be enrolled in a health plan to use the HRA money.
3. It’s important for the employee to understand all options before enrolling in an HRA — The employee could pay more for coverage, use more tax credits than qualified for, or face tax penalties unless options are fully understood.

Coronavirus changes

Under the Coronavirus Aid, Relief, and Economic Security Act (CARES Act, P. L. 116-136, March 27, 2020), over-the-counter medicine and menstrual care products are treated as qualified medical expenses for purposes of HRA reimbursement incurred after 2019.

Individual Coverage HRA

As of January 1, 2020, employers can offer employees an “Individual Coverage HRA” instead of offering a traditional job-based health plan. This type of HRA is an alternative to traditional group health plan coverage to reimburse medical expenses, like monthly premiums and out-of-pocket costs like copayments and deductibles.

If an employer offers an individual coverage HRA and the employee accepts it, the employee (and family, if applicable) must enroll in individual health insurance coverage, or Medicare Parts A (Hospital Insurance) and B (Medical Insurance) or Part C (Medicare Advantage) that starts by the time the individual coverage HRA begins. The employee may also enroll in individual health insurance coverage through the federal or state Marketplace or through a private plan outside the Marketplace.

Qualified Small Employer HRA

Small employers who don’t offer group health coverage to their employees can help employees pay for medical expenses through a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). If a QSEHRA is provided by an employer, the employee can use it to help pay for household health care costs (like monthly premium) for qualifying health coverage.

To use a QSEHRA, the employee (and family, if applicable) must enroll in minimum essential coverage (MEC) such as federal or state Marketplace coverage, coverage through a family member’s job, or Medicare Parts A (Hospital Insurance) and B (Medical Insurance) or Part C (Medicare Advantage).

Excepted Benefit HRAs

The new rules also increase flexibility in employer-sponsored insurance by creating another, limited kind of HRA that can be offered in addition to a traditional group health plan. These “Excepted Benefit HRAs” permit employers to finance additional medical care (for example to help cover the cost of copays, deductibles, or other expenses not covered by the primary plan) even if the employee declines enrollment in the traditional group health plan.