A Health Reimbursement Arrangement (HRA) is a federally approved, tax-favored program an employer can set up for employees. HRAs are accounts funded solely by the employer to reimburse medical expenses of the employee.
Any size company can implement an HRA and save. The amount of savings depends on total company payroll and how much employees contribute toward their benefits.
How an HRA Plan Works
- A high-deductible health insurance plan is coupled with an HRA set up by the employer.
- Using the HRA, the employer reimburses a portion of each employee's medical expenses - usually by paying for part of the deductible.
- The premium savings realized with the high-deductible plan are often more than enough to completely fund the HRA reimbursements.
- HRA reimbursements are 100% tax deductible.
- HRAs are available to any employer, regardless of the number of employees.
- HRAs do not require pre-funding.
The employer maintains complete control over the HRA design.
- The employer chooses the maximum annual reimbursement amount for each employee.
- The employer decides who pays deductible expenses first - the employee or the HRA.
- The employer can retain unused amounts at the end of the year or elect to roll them over and make them available to employees in the following year.
- The employer can retain unused funds should an employee leave the company.
HRA Frequently Asked Questions
Health Reimbursement Arrangements (HRAs)
A health reimbursement arrangement (HRA) must be funded solely by an employer. The contribution cannot be paid through a voluntary salary reduction agreement on the part of an employee. Employees are reimbursed tax free for qualified medical expenses up to a maximum dollar amount for a coverage period. An HRA may be offered with other health plans, including FSAs.
What are the benefits of an HRA? You may enjoy several benefits from having an HRA.
- Contributions made by your employer can be excluded from your gross income.
- Reimbursements may be tax free if you pay qualified medical expenses. See Qualified medical expenses, later.
- Any unused amounts in the HRA can be carried forward for reimbursements in later years.
Qualifying for an HRA
HRAs are employer-established benefit plans. These may be offered in conjunction with other employer-provided health benefits. Employers have complete flexibility to offer various combinations of benefits in designing their plan. You do not have to be covered under any other health care plan to participate.
Self-employed persons are not eligible for an HRA.
Contributions to an HRA
HRAs are funded solely through employer contributions and may not be funded through employee salary deferrals under a cafeteria plan. These contributions are not included in the employee's income. You do not pay federal income taxes or employment taxes on amounts your employer contributes to the HRA.
Amount of Contribution
There is no limit on the amount of money your employer can contribute to the accounts. Additionally, the maximum reimbursement amount credited under the HRA in the future may be increased or decreased by amounts not previously used.
Distributions From an HRA
Distributions from an HRA must be paid to reimburse you for qualified medical expenses you have incurred. The expense must have been incurred on or after the date you are enrolled in the 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.
Reimbursements under an HRA can be made to the following persons.
- Current and former employees.
- Spouses and dependents of those employees.
- Spouses and dependents of deceased employees.
Qualified medical expenses.
Qualified medical expenses are those specified in the plan that would generally qualify for the medical and dental expenses deduction. These are explained in Publication 502, Medical and Dental Expenses. Examples include amounts paid for doctors' fees, prescription and non-prescription medicines, and necessary hospital services not paid for by insurance.
Qualified medical expenses from your 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.
Balance in an HRA
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.
For an HRA to maintain tax-qualified status, employers must comply with certain requirements that apply to other accident and health plans. Chapters 1 and 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits, explain these requirements.
**Information provided by the Department of Treasury, Internal Revenue Service