Health Reimbursement Agreements (HRAs) have been around since the 1970s, but are getting more attention due to the recent changes implemented by the Departments of Health and Human Services, Labor, and Treasury. On June 13, 2019, they issued a new rule beginning in 2020 that allows employees to use an HRA set up by their employer to pay for health insurance premiums, a perk that was not allowed under previous HRA rules.
What Is an HRA?
“HRA’s can be a good option for small businesses that cannot offer health insurance but want to offer benefits to attract high-quality employees.”
An HRA is an agreement between an employer and its employees in which a fixed, tax-deductible amount is set aside for each employee to pay for medical expenses. Money in an HRA is kept in the employer’s account until an employee presents proof of payment for medical expenses, at which time they are reimbursed by the employer.
HRA’s can be a good option for small businesses that cannot offer health insurance but want to offer benefits to attract high-quality employees. Employees may be able to purchase high-deductible, lower-cost insurance policies on their own and then use the HRA benefit to fund medical expenses close to the deductible amount.
Though the details of an HRA vary by business, the steps are always the same:
- The business determines the allowance amount for the year. For 2020, the maximum amounts set by the IRS are $3,550 for an individual HRA, and $7,100 for a family plan.
- An employee makes medical expense purchases using out-of-pocket funds
- The employee submits proof of payment to their employer
- The employer reviews the employee’s documentation to confirm that expenses are eligible
- The employer reimburses the employee for the purchase(s) made
Eligible medical expenses are set by the government, though businesses have the ability to exclude any government-approved expense. The IRS generally defines qualifying medical expenses as costs “primarily to alleviate or prevent a physical or mental disability or illness. They don’t include expenses that are merely beneficial to general health, such as vitamins or a vacation.” The full list of covered expenses can be found in the IRS’ Publication 502 document. Examples of these include:
- Copayments
- Prescriptions
- Diabetic supplies
- Transportation costs associated with medical care
- Medical equipment and repairs
- Substance abuse treatment
- Dental and Vision expenses, such as braces, fillings, glasses and laser eye surgery
Examples of expenses that are not covered include:
- Health club membership fees
- Teeth whitening
- Funeral services
- Marriage counseling
- Childcare for a healthy baby
“HRA funds do not count towards an employee’s gross income.”
Several employees favor HRAs because of the ability to use funds for expenses that may not be covered by traditional health insurance policies, like dental and vision care. Additionally, HRA funds paid by the employer do not count towards an employee’s gross income. While HRA funds usually roll over to the following year, employers have the option to set a maximum rollover limit.
“While HRA funds usually roll over to the following year, employers have the option to set a maximum rollover limit.”
What Types of HRAs Exist?
There are 4 main types of HRAs that currently exist and 2 new types that will go into effect on January 1, 2020.
Existing HRAs:
- The Qualified Small Employer HRA (QSEHRA)
- For businesses with fewer than 50 employees
- Funds are offered in a monthly allowance
- Doesn’t offer a group insurance policy
- The Group Coverage HRA
- An HRA that is linked to a group insurance plan, often a high-deductible plan
- Only those who take part in the insurance plan can participate
- Funds are annual and do not rollover
- The One-Person Stand-Alone HRA
- Has only one participant
- Can be offered by any size business
- Popular with one-person non-profits and churches, as well as entrepreneurs
- The Retiree HRA
- Offered to retired employees
- Can be offered by any size business
- Annual rollover
- Can be used as an alternative to expensive retiree healthcare
HRAs going into effect January 1, 2020:
- Individual Coverage HRA
- Similar to QSEHRA but with fewer restrictions
- Can be offered by any size business
- Only available to employees enrolled in individual insurance (no family member plans)
- Expected Benefit HRA
- Similar to Group Coverage HRA
- Available to employers with an offered health insurance policy
- Capped at $1800 per year per employee
What Makes an HRA Different
HRA’s “do not follow employees to new employers.”
The main difference between HRAs and their counterparts is that they do not follow employees to new employers. Because the HRA is set up by the employer, it can only be used with that specific employer. In 2020, another difference allowing HRAs to pay for health insurance premiums sets them apart from their health account alternatives. Popular health expense payment account include:
- Flexible Spending Account (FSA)
- Paid from pre-tax income by the employee
- Does not roll over to the next period
- Health Savings Account (HSA):
- Paid by employee or employer from pre-tax or tax-discounted income
- Rolls over year-to-year
- Often used with high deductible health insurance plans
HRAs can be used in combination with other health accounts but payment priority is set by the employer. While an employer may offer an HRA, they can decide that the employer must pay for expenses from their FSA, and once it is depleted the HRA will go into effect.
Setting up an HRA for Your Business
Many businesses find HRAs to be advantageous because of the flexibility and predictability offered by the fixed account. Since the employer sets the available amount, it can be changed based on budget restrictions and does not change once the agreement has been set. Businesses also do not need to pre-fund HRAs and can add money to the account during the year.
Experts recommend using HRA plan administrator software but it’s always easier to get started with guidance from a professional. For help setting up your business’ HRA, contact a trusted accountant at Simply Counted Business Services.
About the Author
Diana Kasza
President of Simply Counted Business Services, Inc.Diana is an Accredited Business Accountant/Consultant with more than 25 years of experience. She is a graduate of Ferris State University and an active member of Toastmasters International.