Paul Sanchez
Health reimbursement accounts (HRAs) are a type of health plan that employers can offer to their employees. HRAs are owned by the employer, who sets the rules and decides the amount. Employees cannot contribute to their HRA. The funds in an HRA can be used to pay for eligible medical expenses, as determined by the IRS and the employer. These expenses may include premiums, out-of-pocket costs, and transportation to receive medical care. Employees can also use their HRA to purchase individual health insurance coverage outside of the Marketplace. It's important to note that reimbursements from an HRA are generally not considered taxable income. Another option for individuals is a Health Savings Account (HSA), where individuals can contribute their own tax-deductible funds to save for future medical expenses.
| Characteristics | Values |
|---|---|
| Type of Account | Health Reimbursement Account or Arrangement (HRA) |
| Who Funds the Account | Your employer |
| Purpose | To reimburse yourself for certain medical, dental, vision, or other expenses |
| Tax Implications | Reimbursements for eligible medical expenses are generally not considered taxable income |
| Use of Funds | Pay for eligible medical expenses, as determined by the IRS and your employer |
| Eligibility | Employees must be enrolled in individual health insurance coverage |
| Exclusions | Medical expenses that are fully reimbursed by a flexible spending arrangement cannot be included |
| Alternatives | Flexible Spending Account, Health Savings Account, or traditional group health plan |
| Third-Party Options | Reimbursify app |
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What You'll Learn
Health reimbursement accounts (HRAs)
A Health Reimbursement Account or Arrangement (HRA) is an account-based health plan that allows employers to reimburse employees for eligible medical, dental, or vision expenses. It is a way for employers to provide defined non-taxed reimbursements to employees for qualified medical expenses, including monthly premiums and out-of-pocket costs like copayments and deductibles. Employees must be enrolled in individual health insurance coverage to use the funds.
HRAs are different from Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA) in that the employee does not contribute to the HRA. The employer owns the HRA and sets up the account, deciding on the list of medical expenses that will be covered and the amount. Employees can then pay for expenses upfront and request reimbursement, or the employer may reimburse the network doctor directly.
There are tax advantages to HRAs. Reimbursements for eligible medical expenses are generally not considered taxable income, so employees receive the full amount and do not have to pay federal or state income taxes on the money. Employers can also set up the plan so that unused HRA funds roll over from year to year, although this is not a requirement.
Individual Coverage HRAs are considered affordable for an employee and their dependents if the monthly premium the employee would pay (after the employer's reimbursement) for the lowest-cost Silver plan available to them through the Marketplace in their area is less than 9.12% of their yearly household income. If the offer is considered affordable, the employee will not be eligible for the premium tax credit for their Marketplace coverage.
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Tax advantages of HRAs
A Health Reimbursement Arrangement (HRA) is an employer-funded plan that reimburses employees for qualified medical expenses and, in some cases, insurance premiums. HRAs are considered a tax advantage, offering benefits to both employers and employees.
Employees receive reimbursements tax-free. They can use HRAs to buy their own comprehensive individual health insurance with pre-tax dollars on or off the Affordable Care Act's marketplace. Employees can also use these pre-tax dollars to pay for out-of-pocket health care expenses, such as copayments and deductibles.
Employers can claim a tax deduction for the reimbursements they make through these plans. There is no payroll tax on the amount reimbursed. Employers can also decide to roll over unused HRA funds to the following year, though this is not a requirement.
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Medical expenses that can be reimbursed
A health reimbursement account or arrangement (HRA) is a specific account-based health plan that allows employers to provide defined non-taxed reimbursements to employees for qualified medical expenses, including monthly premiums and out-of-pocket costs, like copayments and deductibles. Employees must be enrolled in individual health insurance coverage to use the funds.
The IRS allows you to deduct unreimbursed payments for preventative care, treatment, surgeries, dental and vision care, visits to psychologists and psychiatrists, prescription medications, appliances such as glasses, contacts, false teeth and hearing aids, and expenses that you pay to travel for qualified medical care.
Deductible medical expenses may include but aren't limited to the following:
- Amounts paid in fees to doctors, dentists, surgeons, chiropractors, psychiatrists, psychologists, and nontraditional medical practitioners.
- Amounts paid for inpatient hospital care or residential nursing home care, if the availability of medical care is the principal reason for being in the nursing home, including the cost of meals and lodging charged by the hospital or nursing home.
- Amounts paid for acupuncture treatments.
- Amounts paid for inpatient treatment at a centre for alcohol or drug addiction; amounts paid for participation in a smoking-cessation program and for prescription drugs to alleviate nicotine withdrawal.
- Age 40 or under—$470.
- Age 41 to 50—$880.
- Age 51 to 60—$1,760.
- Age 61 to 70—$4,710.
- Age 71 or over—$5,880.
You can include only the medical and dental expenses you paid this year, but generally not payments for medical or dental care you will receive in a future year.
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Out-of-network insurance claims
When seeking reimbursement for out-of-network expenses, it is important to carefully review and follow the insurance company's claims process. Small errors, such as misspelled names or incorrect birth dates, are common reasons for claim denials. The reimbursement amount is typically based on the "allowable amount" for the service received, which is the insurer's determined reasonable rate for that specific service in the individual's area. This allowable amount may be lower than the actual amount charged by the out-of-network provider, resulting in a higher out-of-pocket expense for the individual.
To mitigate the potential financial burden of out-of-network care, it is advisable to request coverage at the in-network rate from the insurer before receiving treatment. Insurers may agree to cover out-of-network services at in-network rates in certain circumstances, such as when receiving emergency care or when specific in-network providers are unavailable. Additionally, federal and state protections may safeguard individuals from "balance billing," which is the difference between the insurer's coverage and the provider's actual charges. These protections commonly apply in emergency care situations or when care is unintentionally received from an out-of-network provider at an in-network facility.
To streamline the reimbursement process, individuals can consider using services or apps that specialize in claims management. These services charge a small fee but can increase the likelihood of obtaining reimbursement and may save time and effort. Overall, navigating out-of-network insurance claims can be complex, and it is essential to carefully review the insurance company's policies and procedures to maximize the chances of successful reimbursement.
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Health reimbursement arrangements for employers
A Health Reimbursement Arrangement (HRA) is an employer-funded plan that reimburses employees for qualified medical expenses and, in some cases, insurance premiums. Employers of any size can offer an HRA, as long as they have at least one employee who isn't a self-employed owner or the spouse of a self-employed owner.
The HRA is an alternative to offering a traditional group health plan and is considered an account-based health plan. It allows employers to provide defined non-taxed reimbursements to employees for qualified medical expenses, including monthly premiums and out-of-pocket costs, like copayments and deductibles. Employees can also use the HRA to cover their spouse's and dependents' allowed medical, dental, and vision costs.
The reimbursement amount offered by an employer can vary within each employee class based on age (not to exceed a 3:1 ratio) or the number of dependents. Employers can also set a waiting period for new employees. Employees must incur the expense first, then submit proof of payment to be reimbursed. If an employee doesn't submit a claim, the employer keeps the money, although they may choose to roll it over from year to year while the employee is still employed by the business.
There are a few different types of HRAs, including the Individual Coverage HRA and the Qualified Small Employer HRA (QSEHRA). The Individual Coverage HRA is considered affordable for an employee if the monthly premium the employee would pay (after the employer's reimbursement) for the lowest-cost Silver plan available to them through the Marketplace in their area is less than 9.12% of their yearly household income. If the offer isn't considered affordable, the employee must decline the Individual Coverage HRA to claim the premium tax credit for Marketplace coverage.
The QSEHRA is a health coverage subsidy plan for small employers, allowing them to provide non-taxed reimbursements of certain health care expenses to their employees. With a QSEHRA, small employers can decide what they'll contribute to their employees' health care costs, up to an annual maximum set by the IRS.
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Frequently asked questions
A Health Reimbursement Arrangement (HRA) is an account-based health plan funded by your employer. It allows you to reimburse yourself for certain medical, dental, or vision expenses.
Unlike an HRA, an FSA or HSA is funded by your own contributions. With an HSA, you may also invest your contributions in mutual funds or other investment choices.
The expenses covered by an HRA are determined by your employer. Typically, they include medical, dental, and vision expenses, as well as over-the-counter items.
Yes, reimbursements for eligible medical expenses through an HRA are generally not considered taxable income.
Yes, you may withdraw money from your HSA for non-health-related expenses, but it will be subject to income tax. If you are under 65, there is also a 20% tax penalty on the withdrawn amount.
