A Health Reimbursement Arrangement (HRA) is a tax-advantaged benefit that allows employees and employers to save on healthcare costs. HRAs are strictly employer-funded medical reimbursement plans, meaning the employer sets aside a specific amount of pre-tax dollars for employees to pay for substantiated healthcare expenses annually. HRAs are highly flexible, but they must be funded solely by the employer and used only for qualified medical expenses.
The primary types of HRAs are defined by their structure, employer size, and the type of health coverage they are designed to work with:
Purpose: Allows employers of any size to provide funds to employees for the purchase of individual health insurance premiums and other qualified medical expenses.
Key Feature: There are no annual limit caps on the employer's contribution. It offers maximum flexibility in benefit design and can be used to satisfy the Affordable Care Act's (ACA) employer mandate for Applicable Large Employers (ALEs). Employees must be enrolled in an individual health plan (or Medicare) to participate.
Purpose: Designed specifically for small employers (fewer than 50 full-time equivalent employees) who do not offer a traditional group health plan. It reimburses employees for individual health insurance premiums and other qualified medical expenses.
Key Feature: Contributions are subject to annual maximum limits set by the IRS (indexed for inflation). Unlike the ICHRA, it is available only to small businesses not offering a group plan.
Purpose: Allows employers that offer a traditional group health plan to provide a separate, limited-dollar HRA that covers specific, non-major medical expenses.
Key Feature: It is subject to an annual maximum contribution limit set by the IRS and can reimburse items like dental, vision, and short-term, limited-duration insurance (STLDI) premiums, or deductibles/copayments that are not covered by the major medical plan. Crucially, an employee does not have to enroll in the employer's major medical plan to participate in the EBHRA.
Purpose: Designed to be compatible with a Health Savings Account (HSA). A regular HRA would typically make an employee ineligible for an HSA, but a Limited Purpose HRA does not.
Key Feature: The funds are restricted to reimbursing only dental and vision expenses. This allows an employee to retain their eligibility to contribute to and benefit from an HSA.
Purpose: Allows an employer to reimburse former employees (retirees) for qualified medical expenses, which often include premiums for Medicare (Parts A, B, D) or other individual health plans after they retire.
Key Feature: Since it is offered exclusively to retirees, it is generally exempt from most ACA market reforms, providing flexibility for continued health support in retirement.
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