Brief Introduction of Health Reimbursement Arrangement
A health reimbursement arrangement can be defined as “an employer-funded plan to reimburses employees for qualified medical expenses and, in some cases, insurance premiums.” Health reimbursement arrangement is commonly referred to as HRAs. These allow the employers to claim a tax deduction for the reimbursements they offer. Furthermore, the reimbursement amount received by you is generally tax-free.
Referred to as a health reimbursement account, these are not an account. Therefore, you cannot withdraw the funds in advance and use them to pay your medical expenses. However, you can get a reimbursement for the amount spent. It should be noted that the employer decides the amount they want to put into your HRA plan. This limit set by the employer is the maximum you can request reimbursement for, against the actual medical expenses incurred. However, all the employees in the same class receive the same HRA contribution. This may vary only under certain special cases, where an employee has several dependents. In this case, the employer may grant a higher HRA.
Who Takes a Health Reimbursement Arrangement?
HRAs are not offered by every employer, but they are offered to all the employees at level W-2 or above. Based on your needs and wants, you can participate in an HRA. Reimbursements under an HRA can be made to the current and former employees. They can also be taken by spouses and dependents of those employees. Any person can be claimed as a dependent on the employee unless:
- The person filed a joint return.
- The person had a gross income of $3,400 or more.
- The employee or spouse, if filing jointly, could be claimed as a dependent on someone else’s tax return.
- Spouses and dependents of deceased employees.
Purpose of a Health Reimbursement Arrangement
HRAs are used to pay for qualified medical expenses, which include prescription medications, insulin, an annual physical exam, crutches, birth control pills, meals paid for while receiving treatment at a medical facility, care from a psychologist or psychiatrist, substance abuse treatment, transportation costs incurred to get medical care, and much more. Employees can use the money in their HRAs to cover the allowed medical, dental, and vision costs of their spouses and dependents. Based on the needs of their employees, an employer can offer different types of healthcare reimbursement arrangements.
Qualified Small Employer HRA (QSEHRA)
The QSEHRA is the most popular health reimbursement arrangement available. This HRA was launched in the year 2016 and is available exclusively to small businesses with fewer than 50 employees. This allows small businesses to offer different allowance amounts to employees based on their family size. The monthly HRA allowance amounts can roll over month to month and also from year to year. However, the total QSEHRA reimbursement amount should not exceed the annual limits for the year. The QSEHRA is automatically available to all full-time employees, and businesses can choose to offer it to part-time employees as well.
Group Coverage HRA
The group coverage health reimbursement arrangement is available to businesses that offer group health insurance policies to them. Therefore, if your employer provides group health insurance policies, it is highly likely that they offer group HRAs too. Unlike the QSEHRA, businesses of all sizes can offer the group coverage HRA. Furthermore, there are no allowance caps, and businesses can offer different allowance amounts to different employees.
One-Person Stand-Alone HRA
Through the one-person, stand-alone HRA, businesses of all sizes offer an HRA to a single employee. It can be used to reimburse all the listed expenses. The one-person stand-alone HRA also has no allowance caps or group health insurance requirements. Furthermore, this plan allows for an annual rollover.
This HRA is available solely for the retired employees. The features of this HRA plan are very similar to the one-person stand-alone HRA. For example, businesses of all sizes can offer it, it has no allowance caps or group health insurance requirements, and annual rollover is permitted in this plan as well.
Contents of the Health Reimbursement Arrangement
Healthcare reimbursement account includes medical expenses such as individual health insurance premiums, dental, and vision premiums. The amounts deposited toward a policy such as a life-insurance are deductible.
Furthermore, co-pays, office visits, and prescription drugs are also deductible. In some instances, mileage for travel to and from qualified health care are also included in the HRA. In some individual cases, if a doctor’s note is present, non-prescription drugs are reimbursed.
To participate in a medical reimbursement plan, you must opt-in for an HRA during your employer’s open enrollment period. However, if you have a qualifying life event, you can sign up outside of open enrollment. Spouses and children who are included in your health insurance plan can also be reimbursed through your HRA. Although, if you are self-employed, you cannot use an HRA.
How to Draft the Health Reimbursement Arrangement Work?
Your HRA administrator will usually verify your claim automatically; however, sometimes, you will need to submit the bill from your healthcare provider to substantiate your claim. It is important to note that by law, no expense is too small to be reimbursed. However, logistically, it might be inconvenient for your employer but your employer to reimburse insignificant amounts. Thus, your employer might require you to accumulate a minimum amount of reimbursable expenses.
Your employer chooses how it will reimburse you for qualified medical expenses. Certain plans directly reimburse your doctor, in which case you will not have to request the reimbursement of your expense. According to research, in 2018, an average employer contributed $5,648 per HRA single employee and $14,862 for family coverage. However, in 2019, the annual employer contributions for the same were capped at $5,150 for a single employee and $10,450 for an employee with a family.
[ Also Read: Tuition Reimbursement Form ]
If you are planning to negotiate your medical reimbursement account, you must start with assessing your monthly or annual medical expenses. Once you have a rough estimate, inquire about your employer regarding the plans they offer. Researching the perks of each type of HRA and deciding the plan which suits your needs the best, should be your plan of action before you begin your negotiations.
Benefits & Drawbacks of Health Reimbursement Arrangements
Getting the reimbursement of all your medical expenses is the primary benefit of an HRA. Another major benefit of an HRA is the tax deduction. The reimbursements through an HRA are 100% tax-deductible for employers. Employers often opt for HRAs as an alternative to more expensive retiree healthcare to cover the health costs of retired employees.
HRAs are popular among employers, not only for their tax benefits but also for the predictability that they offer. With HRAs, employers usually know the expense upfront. Furthermore, these offer the employees to pay for a wide range of medical expenses, which may not be covered by their health insurance policies. Another significant benefit of an HRA is that the employer’s contributions do not count toward the employee’s gross income. Hence, an HRA is a bonus offered by the employer and does not affect your monthly take-away.
Sometimes, the employers also provide an HRA debit card, which may allow you to withdraw the reimbursement at the time of service. Although if you use up all the allocated funds in the HRA account before the year-end, you will have to cover any subsequent health bill out-of-pocket or with the funds in your flexible spending arrangement (FSA). Depending on the type of HRA, funds can be used to reimburse health insurance premiums, vision or dental insurance premiums, and other qualified medical expenses. Any HRA money that is unspent by the employee by year-end may be rolled over to the following year, although the employer decides the maximum rollover limit that can be carried over from one year to the next.
Drawbacks of the Agreement:
While a health reimbursement arrangement has innumerable benefits, there are certain limitations to it too. An HRA only covers the medical and dental expenses which have been clarified by the employer. For example, an HRA does not include general health maintenance expenses, such as vitamins, teeth whitening, maternity clothes, funeral services, childcare expenses, marriage counseling, or non-prescription medications. However, employers may include certain expenses that are not usually considered in an HRA. Therefore, it is essential to check with your employer whether a particular medical expense can be reimbursed or not. The list of reimbursable medical expenses is usually outlined in the HRA plan document for employees provided by the employer.
Another limitation of the health reimbursement arrangement is that if you are terminated, or you decide to leave the organization to work for another firm, the HRA gets suspended, and you cannot reap the benefits unless your new employer offers them as well. However, HRAs are not standardized. Thus, your new employer offers different reimbursement rules than your previous employer.
What Happens in Case of Violation?
In case of violation(1) of a health reimbursement arrangement, the employer may have to pay a fine of $100 per day per employee. This fine is up to $500,000 per employer. Therefore, abiding by the rules and regulations laid by the IRS is essential.
A health reimbursement arrangement is a useful entitlement provided by the employer to their employees, which allows you to reimburse your medical expenses(2). These are different when compared to the health insurance policies provided by certain employers as they are hassle-free and is fully contributed by the employer. Although regulated by the Government, an HRA plan is customized by every employer. Both employees, as well as employers, reap tax benefits from HRAs. While the employers get 100% tax deductions on the HRAs, the reimbursement that the employees receive is not taxable.
Another advantage of the HRA is that it covers all the major medical expenses. In some cases, it may also include minor expenses such as health maintenance expenditures. This, however, is at the discretion of your employer. While there are numerous other advantages of availing an HRA, a significant disadvantage is that it is not portable. Furthermore, if you are self-employed, you cannot avail of the perks offered by the HRA.