Health reimbursement arrangements

Scope

HRAs are open to employees of companies of all sizes.

Regulatory citations

• None

Key definitions

• None

Summary of requirements

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; and
• Reimburses generally only Code Section 213(d)(1)(A) medical expenses (medical care includes amounts paid for diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body).

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 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. These are explained in IRS Publication 502, Medical and Dental Expenses . Examples include amounts paid for doctors’ fees, prescription medicines, and necessary hospital services not paid for by insurance. As a result of the Patient Protection and Affordable Care Act of 2010, effective January 1, 2011, over-the-counter medicines cannot be reimbursed through an HRA unless they are doctor-prescribed.

Qualified medical expenses from an HRA include the following:

• Amounts paid for health insurance premiums.
• Amounts paid for long-term care coverage.
• Amounts that are not covered under another health plan.

You can provide debit cards, credit cards, and stored value cards to the participants to reimburse them under an HRA. If any distribution is, or can be, made for other than the reimbursement of qualified medical expenses, any distribution (including reimbursement of qualified medical expenses) made in the current tax year is included in gross income. For example, if an unused reimbursement is payable to a participant in cash at the end of the year, or upon termination of employment, any distribution from the HRA is included in the employee’s income. This also applies if any unused amount upon the employee’s death is payable in cash to the employee’s beneficiary or estate, or if the HRA provides an option for an employee to transfer any unused reimbursement at the end of the year to a retirement plan.

Reimbursements under an HRA can be made to the following persons:

• Current and former employees.
• Spouses and dependents of those employees.
• Any person a participant could have claimed as a dependent on his or her return except that:
• Spouses and dependents of deceased employees.

Amounts that remain at the end of the year can generally be carried over to the next year. Your employer is not permitted to refund any part of the balance to you. These amounts may never be used for anything but reimbursements for qualified medical expenses.

Health reimbursement accounts are not a new type of account designated within the Internal Revenue Code. Rather, employers qualify for preferential tax treatment of funds placed in a health reimbursement account in the same way that they qualify for tax advantages by funding an insurance plan. (Employers can deduct the cost of an insurance plan — and a health reimbursement account — as a business expense under Internal Revenue Code section 162.)

HRAs are open to employees of companies of all sizes, unlike medical savings accounts that are only available for small business employees. An HRA provides “first-dollar” medical coverage until funds are exhausted. For example, if an employee has a $500 qualifying medical expense, then the full amount will be covered by the health reimbursement arrangement if the funds are available in the account. Under a health reimbursement account, the employer provides funds, not the employee. All unused funds are rolled over at the end of the year. Former employees, including retirees, can have continued access to unused reimbursement amounts. Health reimbursement accounts remain with the originating employer and do not follow an employee to new employment.

HRAs are typically offered in conjunction with a high deductible insurance product. They may be offered with other health plans, including FSAs. Employers have complete flexibility to offer various combinations of benefits in designing their plan. Employees do not have to be covered under any other health care plan to participate.