An HRA is not a new style of plan (like the difference between fully insured and self funded). HRAs are simply a new variation in paying for coverage and services. An HRA is an employer owned account used to reimburse employees for eligible medical related expenses on a non-taxable basis. HRAs can be designed in a variety of ways. Plan design allows for flexibility while still providing employer tax advantages.
The primary requirements for an HRA are (1) the plan must be funded solely by the employer and cannot be funded by salary reduction, (2) the plan may only provide benefits for substantiated medical expenses and, (3) the plan will provide reimbursements up to a maximum dollar amount for a defined coverage period, with the option of rolling unused amounts to subsequent plan years.
Eligible reimbursable expenses under an HRA may be defined in many different ways. Employers may choose to allow all code section 213 expenses as eligible reimbursable expenses under the HRA. Employers may choose to allow code section 213 expenses as eligible reimbursable expenses, with certain exclusions, such as excluding mileage reimbursement or lasik surgery. Or, employers may choose to limit allowable expenses to those eligible under their medical plan. The most popular option is to allow as reimbursable only those medical expenses that go towards the group health plan deductible.
HRA requirements provide employers with an option to allow unused HRA funds to carry forward into subsequent plan years (unlike current FSA regulations). Employers may set guidelines such as allowing full unused roll-over, partial unused roll-over or no roll-over at all. Current HRA requirements do not allow for “cash out” of unused funds at the end of a plan year. All funds must be used for eligible medical expense reimbursement.
- HRAs can potentially reduce health plan costs by coupling the HRA with a high-deductible health plan
- HRAs are defined contribution healthcare plans, not defined benefit plans
- HRAs are provided ONLY with employer dollars, not employee salary reductions.
- HRAs may allow employees to roll-over unused balances to the next plan year.
- HRAs do not require that employers advance claims payments to employees during the early months of the plan year.
- HRA reimbursements are not taxable to the employee.
- Employers of any size can adopt an HRA.
- An HRA may be designed to allow former employees (including retirees) to have continued access to unused funds.
- The employer receives a tax deduction in the year the HRA reimbursement is made.
- An HRA provides benefits solely for substantiated medical expenses, thus lump sum pay-outs of unused funds are not permissible.
- An HRA is an attractive benefit to offer in conjunction with a Health Care FSA.