Helping employees afford out-of-pocket medical expenses
Does your company offer a Health Reimbursement Account (HRA) for employees? With rising out-of-pocket expenses, an HRA can provide you an opportunity to cushion the blow for your employees – and can be a powerful recruiting and retention tool. As more employer-sponsored health plans elect to include an HRA, the need to educate employees about this important benefit and how it can help them afford health expenses is more important than ever.
What is an HRA?
Health reimbursement accounts, sometimes called health reimbursement arrangements, are employer-funded group health plans from which employees are reimbursed tax-free for qualified medical expenses up to a fixed dollar amount per year. The employer funds and owns the account and may elect to roll over any unused amounts to be used in subsequent years. While FSAs and HSAs allow employees and employers to contribute pre-tax dollars through payroll, the fundamental difference with HRAs is that they are solely funded by the employer or plan sponsor. For more in-depth information on HRAs, download our whitepaper Health Reimbursement Accounts: Helping Your Employees Afford Out-of-Pocket Medical Expenses.
Despite being defined as group health plans, due to Affordable Care Act (ACA) restricting annual limits on group health plans, HRAs are generally offered alongside a comprehensive health plan. These integrated HRAs utilize the underlying health plan to remain compliant with the requirement regarding annual limits.
Plan design options
HRA plan designs can vary from employer to employer. Employers may elect to design an HRA than only covers expenses for the employee or the employee and their dependents. If an HRA covers dependents, they must also be covered under the integrated comprehensive health plan. The Plan Documents associated with your HRA will define the specific rules for your company, so be sure that all employees understand their benefits.
IRS Publication 502 defines eligible medical and dental expense for IRS purposes. While Publication 502 can often be used as a guide to determine if an expense is likely eligible under an HRA, it will not always be the determining authority. Employers have the ability to place additional restrictions on what is considered an eligible expense for HRA reimbursement purposes. Your employees should always refer to their plan documentation for additional guidance on what expenses are covered.
HRAs can also provide employers with a means of ensuring a happy, healthy retirement for their loyal and valued employees. Retirement HRAs allow employers to provide retiring employees with tax-free money to help them pay for qualifying medical expenses incurred during retirement. IRS Section 213(d) defines what expenses are considered qualifying and can be paid out of the Retirement HRA.
Your retired employee doesn’t have to pay taxes on the money in their Retirement HRA because you still own it, and the funds you deposit into the account are tax-deductible for your company. With the growing gap between Medicare coverage and medical expense costs, a Retirement HRA is a valuable benefit to your former employees that shows your appreciation for their dedication to your company.
If it wasn’t already clear, HRA rules can be complicated. While Publication 502 and the ACA can impact the structure or application of HRAs, many of the most common aspects of these plans are determined by the plan sponsor, including:
- the annual amount allocated to employees
- eligible expense categories for reimbursement
- whether or not amounts rollover from year to year
- when and how claims need to be incurred and submitted for reimbursement
The employer’s contribution to the HRA is entirely tax deductible. This means that you can offer your employees more health coverage options while decreasing your tax exposure.
Sheakley and your HRA
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