What kind of reimbursement options exist for employers and their employees? How can you allow employees to pay for a range of medical expenses that aren’t covered by their insurance? What is a Health Reimbursement Account (HRA) anyway?
Commonly known as an arrangement, a Health Reimbursement Account is a great way to supplement health insurance benefits. HRAs provide vast benefits to your employees and your business.
Health Reimbursement Account (HRA) 101
Unlike the Flexible Spending Account, HRAs are funded by the employer and do not allow for employees to contribute funds to the account. Therefore, unused dollars remain with the employer.
HRAs can only be offered to employees who have coverage by a health plan that meets the ACA minimum coverage requirements.
Employers can choose to allow HRA funds to rollover year after year while the employee remains actively employed. Unused funds do not follow employees to new employment or beyond termination of employment (unless continuing medical plan coverage during a COBRA continuation period).
Through the HRA, employers reimburse their employees after an approved out-of-pocket medical expense is made in that plan year. Reimbursements can sometimes include qualified health insurance premiums. And there is no limit to the amount an employer can contribute to the account. Don’t mistake this for reimbursing your employees for health insurance premiums directly as talked about here.
Reimbursements occur pre-tax, therefore, you and your employees will save on your tax expenses related to the cost of medical expenses.
This added bonus is a great way to supplement health insurance benefits. As quality employees are increasingly expecting great benefits packages, this is a way to recruit and retain top talent.
HRA Eligible Expenses
As the employer and sole contributor to the account, you can decide which qualified expenses can be reimbursed. As long as the reimbursements are for items considered qualified medical expenses under IRS Section 213 of the Code.
The Benefits and Drawbacks
One of the greatest benefits the HRA gives employers and businesses is the flexibility it offers. Since the account is managed and funded solely by the employer, you have the ability to design the program to fit your specific business needs.
You get to decide exactly how much to contribute to your employees’ allowances, you decide what types of qualified medical expenses to reimburse, and you decide what to do with unused funds. As long as your program remains in compliance, you can take the lead with this flexible option.
Employers can change their HRA plans annually or cancel the plan entirely. Additionally, you can choose to limit reimbursements for any category of qualified expense, like dental.
The Tax Advantage
Using an HRA allows you to deduct HRA reimbursements as a business expense which lowers your cost of FICA and FUTA taxes. This is a huge cost savings benefit for your business. Likewise, your employees benefit from the tax savings, they will save 20-40% on medical expenses because they are essentially using pre-tax dollars to make these purchases.
As mentioned above, the use of benefits like the Health Reimbursement Account are a great way to recruit and retain quality employees. Especially if you can’t offer the kind of affordable health insurance employees might expect, the HRA is a great way to make up for it.
Some employers would consider the added administrative duties to be the downside of offering benefits like the HRA. Although, more and more employers and organizations are choosing to outsource these duties to companies like a Professional Employer Organization (PEO) so their in-house HR staff can focus on more strategic initiatives.
We hope we’ve answered some of the questions you had about “what is a Health Reimbursement Account?” For more information regarding benefits or HR administration, contact us, and we’ll be happy to help.