HRA Plans: What You Need to Know About Qualified Expenses, Taxes, and More

HRA Plans

Health Reimbursement Arrangements (HRAs) are employer-sponsored benefit plans that allow employees to withdraw tax-free money to pay for qualified medical expenses. Unlike other types of employer-sponsored healthcare benefits, the employer owns the HRA and completely funds it; employees do not make contributions. If your employer offers an HRA, here are some important things to know about the accounts.

Since HRAs are employer-owned, HRA plan setups vary. Depending on plan parameters, some companies will fund participant accounts in full at the beginning of the plan year, while others may choose to fund them monthly, quarterly or semi-annually. After incurring a qualified medical expense, the participant files a claim for reimbursement. If all the HRA funds are spent before the end of the year, that’s it – no additional funds will be added to the account. Once the account balance is exhausted, any additional medical expenses are paid for out-of-pocket by the participant. If there’s money left over at the end of the year, the employer has the option of rolling it over to the next year.

Unlike a Health Savings Account (HSA), HRAs are not portable. If the participant leaves the job or is terminated, any unused funds remain with the employer. There are some exceptions, though. Employers may permit terminated employees to access HRA funds to pay for expenses incurred while the person was still employed. Also, some plans may allow retirees to enroll in a special retirement HRA plan as part of a health coverage package.

Generally, there are no limits on employer contributions to regular HRA plans. One exception is the Qualified Small Employer HRA (QSEHRA); in 2017, maximum employer contributions for QSEHRAs are $4,950 for an employee with individual coverage and $10,000 for an employee with family coverage.

Medical Expenses Covered by HRA Plans

Under IRS Section 213 of the Internal Revenue Code, HRAs can reimburse any expense considered to be a qualified medical expense. However, because employers own the HRA plan, they have the authority to specify which medical expenses are eligible for reimbursement, as long as the company adheres to IRS guidelines.

Most HRAs cover common medical expenses such as deductibles, coinsurance, and copays. They may also cover other medical costs not covered by health insurance as long as they are IRS-approved. As plan specifications may vary, participants should check to see if their HRAs cover dental and vision expenses, as most HRA plans do not.

Due to regulations in the Affordable Care Act (ACA), standard HRAs cannot reimburse for health insurance premiums. However, with the passage of the Cures Act in December 2016, small employers (those with fewer than 50 employees) who do not have a group health plan can offer a QSEHRA for premium reimbursement. Learn more about QSEHRAs.

Taxable HRA Situations

As with other tax-friendly healthcare accounts, reimbursed expenses cannot be deducted on your tax returns. Participants also cannot ‘double-dip’ by submitting the same expenses for reimbursement from their FSA or HSA. In general, the IRS does not tax the payments employees receive from an HRA, although there are exceptions.

For example, under an HRA, employers are not allowed to reimburse employees for any non-medical expenses. The IRS considers reimbursement for non-qualified expenses to be deferred compensation, and it is therefore taxable. Moreover, if an employer does reimburse non-medical expenses, all payments received from the HRA plan become taxable – including those that would otherwise be considered an eligible medical expense.

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

  • Comply with the “medical expenses only” requirement, but reimburse employees for some or all of their unused money at the end of the year
  • Provide a death benefit to employees’ dependents from unused funds, and allow the funds to be used for non-medical expenses
  • Allow unused account dollars to be applied to other company benefits, such as a 401(k) contribution

HRA plans offer tax advantages to both employers and employees. If you’re not sure whether your company offers an HRA plan, contact your human resources department.

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