Health Reimbursement Arrangements (HRAs)

Traditional Health Reimbursement Arrangements (HRAs)

Overview and History of HRAs

Health Reimbursement Arrangements (HRAs), introduced in the early 2000s, represent a significant shift in the way employers could contribute to their employees’ healthcare costs. An HRA is an employer-funded plan that reimburses employees for qualified medical expenses, including insurance premiums in certain cases. These arrangements are not only beneficial for employees in managing out-of-pocket healthcare costs but also provide tax advantages for employers.

The unique aspect of HRAs is their flexibility. Employers can customize the contribution limits, eligible expenses, and other plan features according to their financial capabilities and their employees’ needs. This flexibility allows HRAs to adapt to various business sizes and types, making them a versatile tool in the healthcare benefits landscape.

Understanding Medical Expense Reimbursement Plans (MERPs)

Before the popularization of HRAs with rollover options, Medical Expense Reimbursement Plans (MERPs) were commonly used. MERPs, the precursors to modern HRAs, were employer-funded plans that specifically provided reimbursement for medical expenses incurred by the employees, typically relating to the employer’s health insurance plan deductibles.

The introduction of rollover options in HRAs around 2002 was a pivotal development. It allowed unused funds in the HRA to be rolled over for future use, increasing the plan’s flexibility and appeal. This feature marked a shift from MERPs to more dynamic HRAs, where the benefit could extend beyond a single plan year, providing more long-term value to employees.

MERPs and HRAs signify an employer’s commitment to supporting their employees’ healthcare needs. While MERPs were more focused on managing specific healthcare costs, HRAs have evolved to offer broader support and more flexibility in covering a range of healthcare expenses. This evolution reflects the changing dynamics of employer-sponsored healthcare benefits and the growing need for adaptable, employee-centric health benefit solutions.

How HRAs Work

Structure and Functioning of HRAs

Health Reimbursement Arrangements (HRAs) are employer-funded plans that reimburse employees for qualified medical expenses. These arrangements are not part of an employee’s salary but are an additional benefit provided by the employer. The structure of an HRA is quite flexible, allowing employers to define what qualifies as reimbursable expenses, within the guidelines set by the IRS.

Employers fund HRAs on a pre-determined schedule, often annually. These funds can then be used by employees throughout the plan year to pay for eligible medical expenses, such as deductibles, co-payments, and other healthcare costs not covered by insurance. Some HRAs also allow for reimbursement of insurance premiums.

One of the key features of an HRA is that it does not require employee contributions. All the funds in the HRA come from the employer, making it a purely employer-funded benefit. This aspect distinguishes HRAs from other consumer-directed healthcare accounts like HSAs or FSAs, which can include employee contributions.

Employer Contributions and Plan Management

Employer contributions to an HRA can vary based on the company’s policy and financial capability. There is no minimum or maximum contribution limit set by the IRS for HRAs, giving employers significant freedom to decide how much they want to allocate to each employee’s HRA.

The management of an HRA typically involves:

• Setting Up the Plan: Employers must set up the HRA plan, defining the terms of contributions, eligible expenses, and any rollover provisions.
• Funding the Accounts: Employers fund the HRAs based on the schedule and amounts they have determined.
• Claims Processing and Reimbursement: Employees submit claims for their healthcare expenses, and these claims are then processed by the employer or a third-party administrator. Reimbursements are typically made directly to the employee.

In some HRAs, unused funds at the end of the plan year can be rolled over to the next year, increasing the value of the benefit for employees. However, this is at the employer’s discretion and is not a requirement of HRAs.

In summary, HRAs offer a flexible and employer-focused way to provide healthcare benefits. By understanding the structure and functioning of HRAs, employers can tailor these arrangements to fit their business model and employees’ needs, while employees can benefit from an additional source of funding for their healthcare expenses.

Eligibility and Enrollment in HRAs

Eligible Expenses and Reimbursement Process

Health Reimbursement Arrangements (HRAs) allow employees to be reimbursed for a wide range of medical expenses, as defined by the employer within IRS guidelines. Common eligible expenses under an HRA include:

• Deductibles and co-pays.
• Prescription medications.
• Medical procedures and treatments not covered by health insurance.
• Some HRAs also allow reimbursement for insurance premiums.

The reimbursement process typically involves the employee paying for the medical expense out of pocket and then submitting proof of the expense, such as a receipt or an Explanation of Benefits (EOB), to the employer or the plan administrator. The employer then reimburses the employee up to the maximum amount available in their HRA.

Special Considerations for Different Types of HRAs

1. Standard HRAs: These HRAs offer the most flexibility and can cover a broad range of medical expenses. Employers have significant discretion in defining eligible expenses and setting reimbursement limits.
2. Limited HRAs: Often paired with HSAs, limited HRAs usually only cover specific types of expenses, like dental and vision care, to complement the HSA’s broader coverage.
3. Post-deductible HRAs: These are designed to provide reimbursements only after the employee has met their health insurance deductible. They can be a cost-effective solution for both employers and employees, focusing resources on larger medical expenses.
4. Retiree HRAs: Aimed at retired employees, these HRAs can be used to reimburse Medicare premiums and other medical expenses during retirement.

In all cases, it’s crucial for employees to understand the specific terms of their employer’s HRA, including what expenses are eligible, how to submit claims, and any deadlines for reimbursement. Employers should provide clear guidelines and support to ensure employees can effectively utilize their HRA benefits.