What Is a Health Reimbursement Arrangement?

HRAs allow employers to reimburse workers for medical costs

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Health reimbursement arrangements are also known as health reimbursement accounts. They are generally referred to as HRAs, so they're part of the many acronyms you will hear that include FSA, HSA, PPO, EPO, HMO, POS, and more.

Employees often encounter HRAs when perusing their benefit options. HRAs are simply a way for employers to reimburse employees for out-of-pocket medical expenses using tax-free money. There are various rules and regulations that apply to HRAs, some of which have changed recently or could change in the near future.

The IRS outlines the rules for HRAs in Publication 969.

Funding

HRAs are funded solely by the employer. This is different from FSAs and HSAs, which can be funded by the employer and the employee. So if your employer offers an HRA, you won't be sending any portion of your paycheck to the account.

Employees don't have to pay taxes on the amount that their employer contributes to an HRA on their behalf, nor do they have to report anything about the HRA on their tax returns.

Since HRAs must be funded by an employer, self-employed people cannot establish HRAs.

Reimbursements

You only get reimbursed from your HRA when you submit proof of a qualifying medical expense to your employer. Unused HRA funds can roll over for use in the next year, or the employer can impose a "use it or lose it" rule.

As long as employees use the money in the HRA for qualified medical expenses, the withdrawals are tax-free. But employers can place their own limits on what expenses can be covered with the HRA funds, so an HRA offered by one employer won't necessarily cover the same expenses as an HRA offered by another employer.

HRA funds can be used to reimburse medical expenses incurred by the employee, but also the employee's spouse and dependents, children under the age of 27, even if they're no longer a tax dependent, and some people who could have been claimed as a dependent but weren't (see page 18 of Publication 969).

Having an HRA at work (or via a spouse's employer) will generally make a person ineligible to contribute to an HSA, even if they have an HSA-qualified health plan. But there are a few types of restricted HRAs that an employee can have and simultaneously be eligible to contribute to an HSA: limited purpose HRAs, post-deductible HRAs, suspended HRAs, and retirement HRAs.

The IRS does not limit how much an employer can contribute to their employees' HRAs, so employers can set their own caps (note that Qualified Small Employer Health Reimbursement Arrangments—QSEHRAs—do have maximum reimbursement amounts established by the IRS. These accounts became available in 2017 and are discussed below).

Eligibility

There is no specific type of health insurance plan that you must have in order to have an HRA (in contrast with an HSA—in order to contribute to an HSA or receive employer contributions to an HSA, you must have coverage under an HSA-qualified high-deductible health plan).

However, with the exception of small employers offering Qualified Small Employer Health Reimbursement Arrangements, employers do have to provide group health insurance in conjunction with the HRA. They cannot offer an HRA on its own or use an HRA to reimburse employees for the cost of individual market health insurance that the employees purchase on their own. This was clarified in the regulations that were issued in 2013 during the process of implementing the Affordable Care Act.

The Trump Administration has proposed changing this rule. In late 2018, the Departments of Treasury, Labor, and Health & Human Services proposed new rules that would expand the use of HRAs by allowing employers to use them to reimburse employees for the cost of individual market health insurance and the associated out-of-pocket costs.

The proposed rule would also allow employers to use HRAs to reimburse employees for the cost of "excepted benefits," which are things like short-term health insurance and fixed-indemnity plans, which are not regulated by the Affordable Care Act. The proposed changes would take effect in 2020 if finalized as proposed.

QSEHRAs

When HHS, the IRS, and the Department of Labor were developing rules to implement the Affordable Care Act, they issued regulations banning employers—both small and large—from reimbursing employees for the cost of purchasing health insurance in the individual market. The regulations came with a steep $100 per day penalty for non-compliance.

The 21st Century Cures Act, which passed with strong bipartisan support and was signed into law by President Obama in December 2016, relaxed those rules for small employers. The 21st Century Cures Act is a wide-ranging piece of legislation, but one of its provisions was to allow employers with fewer than 50 full-time equivalent employees to set up Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs).

The IRS subsequently provided an extensive set of FAQs regarding the QSEHRAs, which are helpful in understanding how these plans work.

While traditional HRAs can only be offered in conjunction with an employer-sponsored group health plan, QSEHRAs can only be offered if the employer does not offer a group health plan. Instead, the employees seek out their own individual market health insurance (in the exchange or outside the exchange), and the employer can reimburse them for some or all of the cost.

Unlike traditional HRAs, the IRS does impose a cap on how much reimbursement employees can receive via a QSEHRA. In 2019, a small employer can use a QSEHRA to reimburse an employee up to $5,150 if the employee has self-only coverage and up to $10,450 if the employee has family coverage.

Employees whose individual market premiums are reimbursed via a QSEHRA can still be eligible for premium subsidies in the exchange, but not if the QSEHRA benefit brings the net premium for the employee's coverage (not counting the premium for additional family members) under the second-lowest-cost silver plan down to less than 9.86 percent of the employee's household income in 2019 (this percentage is indexed annually).

The IRS puts an upper limit on how much employers can reimburse via a QSEHRA, but there's no minimum requirement since this is a voluntary program (under ACA rules, small employers are not required to offer coverage of any sort). So if an employer reimburses only a nominal amount, the employee might still find that the second-lowest-cost silver plan in the exchange is more than 9.86 percent of their household income, even after applying for the QSEHRA benefit.

In that case, the employee could also receive premium subsidies from the federal government, but the amount of the subsidy would be reduced by the amount that the employee is getting via the QSEHRA—in other words, there's no "double-dipping."

Proposed Expansion of HRAs

The introduction of QSEHRAs in 2017 made it possible for small employers to reimburse employees for individual market health insurance premiums, using tax-free money. But again, small employers have no responsibility for health insurance under the ACA. They are not required to offer coverage and can instead simply direct their employees to seek out their own coverage in the individual market, without paying anything towards the cost.

QSEHRAs essentially let small employers do more than is required of them, by allowing them to help employees pay for that coverage on a pre-tax basis.

Large employers are a different story. Under the terms of the ACA, employers with 50 or more full-time equivalent employees are required to offer affordable, minimum value coverage to at least 95 percent of their full-time employees. If they don't, and if any of their employees end up getting premium subsidies in the exchange, the employer is subject to a penalty.

Furthermore, the coverage that is offered has to be employer-sponsored group health insurance. The 2013 regulations issued by the Departments of Labor, Treasury, and Health & Human Services made it clear that employers could not rely on individual market coverage to fulfill the employer mandate portion of the ACA.

But in late 2018, the Trump Administration issued proposed regulations that would change this starting in January 2020. The proposal was tied to an executive order that President Trump had signed more than a year earlier, which called for "expanding the flexibility and use of HRAs" and allowing "HRAs to be used in conjunction with nongroup coverage" (nongroup means coverage that people purchase themselves, as opposed to a group plan offered by an employer).

Under the terms of the proposed rule, large employers would be able to satisfy the ACA's employer mandate by offering an HRA integrated with individual market health insurance (namely, nongroup coverage). The coverage would have to be either ACA-compliant individual market coverage (sold in the exchange or outside the exchange), student health insurance, or a grandfathered individual market plan.

If an employer were to start offering an HRA integrated with individual market coverage under the terms of the proposed rule, the employees would have access to a special enrollment period during which they could purchase a plan in the individual market, even if it wasn't during the annual open enrollment period.

Under the proposed rule, the HRA coverage would be considered affordable as long as the employee's portion of the premium—after applying the employer's HRA contribution—for the lowest-cost silver plan in the exchange wouldn't exceed 9.86 percent (indexed annually) of the employee's household income. This is similar to the affordability test for QSEHRAs, except that the lowest-cost silver plan would be the reference point, instead of the second-lowest-cost silver plan.

The Administration sought comments on this, but noted that the lowest-cost silver plan is the lowest-priced plan that can be guaranteed to provide an actuarial value of at least 60 percent (since bronze plans can have actuarial values as low as 56 percent), which is the minimum required for an employer-sponsored plan to provide minimum value.

Under the proposed rule, employees receiving HRAs integrated with individual market coverage would not be eligible for premium subsidies in the exchange. But if it was determined that the HRA was not offering affordable, minimum value coverage, the employee would be able to opt out of the HRA and receive premium subsidies in the exchange instead, assuming they were otherwise subsidy-eligible.

Employers would be able to divide their workforce into certain accepted employee classifications (for example, full-time versus part-time, employees under the age of 25 versus over the age of 25, and employees who live in a particular rating area) and offer differing HSA benefits to different employee classes. They would also be able to offer some employee classes a group health plan while offering other employee classes an HRA that could be used to reimburse employees for individual market coverage.

But they could not offer both options to the same class of employees.

A given employee could not have the option to pick either coverage under the employer-sponsored group plan or coverage under an HRA that reimburses individual market premiums.

Another portion of the proposed rule would allow employers to offer "excepted benefit HRAs" that would allow employees to be reimbursed for the cost of excepted benefits and short-term health insurance plans. Excepted benefits are not regulated by the ACA, and are generally not suitable to serve as a person's only health coverage. Short-term health insurance can serve as stand-alone coverage, but only temporarily. And since it is not regulated by the ACA, there are numerous gaps in the coverage (essential health benefits do not have to be covered, plans can impose benefit caps, and pre-existing conditions are not covered).

Unlike HRAs integrated with individual market coverage, employers offering excepted benefit HRAs would have to also offer those employees regular group health insurance. But the employees would have the option to decline the group health plan and use the excepted benefits HRA instead. The proposed rule would cap an employee's total reimbursement under an excepted benefits HRA at $1,800 (indexed in future years).

A Word From Verywell

When the ACA was first implemented, HRAs could not be used to reimburse employees for the cost of individual market health insurance. However, the federal government determined that HRAs could only be offered in conjunction with an employer-sponsored group health insurance plan. This continues to evolve, however. QSEHRAs make it possible for small employers that don't offer group health insurance to use the HRA model to reimburse employees for the cost of individual market coverage. HRAs will also continue to serve a useful purpose for employers that do offer group health insurance plans and want to help their employees pay their out-of-pocket costs with pre-tax funds.

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