Health Reimbursement Arrangements – HRA Accounts Explained

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IRS Publication 502

Health Insurance Plan Plus an Arrangement to Pay Medical Expenses

A Health Reimbursement Arrangement or HRA is a combination of any health insurance policy approved for sale as an employee benefit plan and a separate arrangement to reimburse employees for all or a portion of the qualified medical expenses not paid by the health insurance policy. An HRA is quite often referred to as a Health Reimbursement Account (Accounts); however it does not require the establishment of a separate funding account. It is an arrangement whereby an employer agrees to pay certain medical expenses. When a Third Party Administrator (TPA) is used, the TPA may establish a small account on behalf of the employer.

Congress created the HRA as the newest consumer-directed plan designed to cover medical expenses and it is subject to IRS regulations and guidelines. While usually a high-deductible plan is chosen for the insurance portion, there is no requirement to do so, and any approved plan can be used. The employer determines the reimbursement arrangement.

Uses All Employer Funds and Employer Makes All the Decisions

The HRA is designed for companies employing two or more employees, excluding sole-proprietors and owners of subchapter-S corporations from participation. Employer funds are used to reimburse employees for qualified medical expenses in accordance with the pre-established employer arrangement. IRS requirements for qualified medical expenses also apply. Employer payments are a tax-deductible business expense and reimbursements to employees are tax-free. Availability of plans is limited to the qualified plans offered by insurance companies conducting business in your State. PacificSource Health Plans has a qualified HRA plan and a large selection of insurance plans to choose from, which ehealthlink.com offers.

Since only employer funds are involved, the employer determines the amount to reimburse each year, the amount that can be carried over each year, when to make reimbursements, whether the employee or the employer pays first, what happens when an employee leaves the company and what is the maximum an employee can accumulate. The employer may have other options available to him as well.

Reimburses Employees for Medical Expenses and Allows Carry-over

The arrangement specifies a dollar-limit for the amount of qualified expenses that will be reimbursed to an employee each year. The arrangement also usually specifies that any unused allocation of funds can be accumulated and carried over for use next year. Since the employer owns the funds until presented with valid receipts, there are no actual funds accumulated that employees own to rollover to a new employer or take with them if they leave the company. An employer could continue to reimburse a former employee if he chooses to do so.

Encourages Employee to Make Wise Health Care Choices

Let's say an employer provides a health plan with a $2,500 deductible and agrees to reimburse employees up to $1,000 per year for eligible expenses. If an employee uses this allocation wisely, he may have all or most of this allocation left to carryover for next year. In three to five years, the employee could have enough accumulated to pay 100% of the expenses for any major medical situation that occurs, including the deductible and co-insurance amounts. On the other hand, an employee, who because of necessity or over-use spends $2,000 the first year, would receive $1,000 in reimbursements and would owe $1,000 to health care providers because the deductible hadn't been met for the year.

Account Administration by the Company or Third Party Administrator

A simple corporate board resolution can be used to establish the reimbursement arrangement and the company itself can administer it. Usually a TPA is chosen as the most cost-effective and convenient method of drafting and administering the arrangement when more than just a few employees are involved. The TPA collects all the claims, sends a single monthly bill to the employer and reimburses all the employees. This could save a considerable amount of time when a single physician visit with lab tests and x-rays could result in claims from up to three different healthcare providers all arriving at different times. PacificSource has partnered with Manley Services, a licensed TPA.