HRA Plan Facts: Qualified Expenses, Taxes, and More

Health Reimbursement Arrangements (HRAs) are employer-sponsored plans that reimburse participants for qualified expenses. These accounts are entirely funded by the sponsoring employer. Let’s learn more about HRAs by looking at plan facts like qualified expenses, taxes, and more.

Generally, there are no limits on employer contributions to regular HRA plans. However, an exception is the Qualified Small Employer HRA (QSEHRA). This plan is only available to employers with 50 or fewer full-time employees. Learn more about current contribution limits here.

Need-to-Knows about HRAs

HRA plan designs vary.

After incurring a qualified medical expense, the employee/participant is eligible for reimbursement from the HRA plan. That’s can be where the similarities end between HRA plan designs because sponsoring employers have a wide range of options. Some examples include:

  • Eligible expenses – some reimbursements are restricted to expenses incurred against the health plan deductible, while others allow co-pays and co-insurance.
  • Reimbursement procedures – some HRA plans require an insurance carrier explanation of benefits (EOB) to gain reimbursement, while others may accept a medical provider’s itemized billing.
  • Expense categories – expense categories may vary from employer to employer and can include medical expenses only or a combination of medical, dental, and vision.
  • Plan funding – all available reimbursement funds may be available at the beginning of the plan year or incrementally (semi-annually, quarterly, monthly, or by claim).
  • Unused funds – although most HRAs do not roll over of unused funds to the following plan year, some do allow rollover.

HRAs are not portable.

When a participant’s employment ends, unused funds remain with the employer. However, terminated employees may be able to use HRA funds to pay for expenses incurred while they were still employed. Also, some plans may allow retirees to enroll in a retiree-only health coverage HRA plan.

HRA plans may restrict eligible expenses.

Per Section 213 of the Internal Revenue Code, HRAs can reimburse any permitted and qualified medical expense. However, the sponsoring employer can specify which medical expenses to make eligible. Most HRAs cover deductibles, copays, and coinsurance. But they may also cover other IRS-approved medical costs like dental and vision expenses.

Most HRAs cannot pay for insurance premiums.

Under the Affordable Care Act (ACA), standard HRAs cannot reimburse health insurance premiums. However, employers with fewer than 50 full-time employees (with no group health plan in force) can offer a QSEHRA reimbursement of individual insurance premiums, and employers of any size can offer an ICHRA for the same purpose.

HRA reimbursement or tax deduction; not both.

As with other tax-saving healthcare accounts, participants cannot take both an HRA reimbursement for an expense and then also an itemized tax deduction for the same expense. Also, participants cannot submit the same portion of the same expense for reimbursement from both their HRA and an FSA or HSA.

HRA reimbursements are generally not taxable.

The IRS generally does not tax reimbursements employees receive from an HRA. An exception is when employers reimburse non-medical expenses. The IRS considers that to be deferred compensation and, therefore, taxable to the employee. Should an employer reimburse non-medical expenses, all reimbursements received from the HRA plan become taxable.

In addition, certain types of HRA plan designs can trigger a shift from non-taxable to taxable income. These include plans that:

  • Meet the medical expense requirement, but reimburse employees for some or all of their unused balance at the year’s end
  • Provide a death benefit to an employee’s dependents from remaining funds, and allow the funds to pay for non-medical expenses
  • Allow remaining funds to contribute to other company benefits, such as a 401(k).

HRA plans offer many advantages to both sponsoring employers and their employees. But it’s essential to keep HRA plan facts like qualified expenses and tax implications in mind for effective usage and maximum savings.