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February 24, 2024 | read

Flexible Health Insurance with Health Reimbursement Arrangements (HRAs)

Brandon Hall

Flexible Health Insurance with Health Reimbursement Arrangements (HRAs)

Under IRC Section 105, an employer may establish a health reimbursement arrangement (HRA) for his/her employees. This plan is supported by Revenue Ruling 71-588 and Letter Ruling 9409006, and also meets compliance regulations of the Department of Labor and the Employee Retirement Income Security Act.

An HRA is employer-funded and allows employers to reimburse employees for their out-of-pocket medical expenses, including their employee’s personal health insurance premiums. HRAs are a great way to offer health insurance support without having to pay for expensive group health coverage.

An HRA is not health insurance, but rather a fund that the employer contributes to on an ongoing basis. The monthly contributions (allowances) are set by the employer each year and are contributed to the fund regardless of whether an employee uses the entire allowance. The employee can, at any point, be reimbursed up to their aggregate allowance amount.

For example, let’s say you start an HRA plan for your company which includes two of your employees who are both single. You contribute $200 per month to the HRA for single employees (so you contribute $400/mo for your two single employees). Bob’s health insurance premiums are $250 per month, so Bob uses his entire $200/mo allowance each month when he submits his health insurance receipts. The HRA disburses Bob’s $200/mo each month as a result. Amy, on the other hand, only uses $150/mo for her health insurance premiums. Because Amy doesn’t use $50 per month, the allowance continues to accrue in the account. If in 10 months Amy undergoes surgery, she could, at that time, get reimbursed for $500 of her cost ($50 x 10 months).

All HRAs follow the same structure:

  1. The business sets the monthly allowance amount. The business owner determines the monthly allowance. The contributions to the HRA are tax deductible to the employer and reimbursements issued to employees from the HRA are tax-free to the employee.
  2. Employees make purchases and choose a health insurance plan on the Exchange or other options. 
  3. Employees submit proof of expenses incurred to the HRA plan provider. 
  4. The HRA plan provider reviews employee documentation for HRA-qualified expenses. 
  5. The business reimburses employees for approved expenses. 

HRA-eligible expenses include:

  • Individual health insurance premiums
  • Individual dental or vision premiums
  • Amounts paid toward a policy’s deductible
  • Copays
  • Office visits
  • Prescription drugs
  • Nonprescription drugs (with a doctor’s note)
  • Mileage for travel to/from eligible health care

In 2019, annual employer contributions for qualified small employer HRA (QSEHRAs) are capped at $5,150 for a single employee and $10,450 for an employee with a family.

However, for other HRAs, such as a group coverage HRA or a one-person stand-alone HRA, there are no annual contribution limits.

For more information on HRAs, check out this article by Peoplekeep.

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