What is an HRA?

An HRA is a “health reimbursement arrangement”. It is a way for employers to provide tax-free health benefits to their employees, under Sections 105 and 106 of the Internal Revenue Code.

May employees make contributions to an HRA?

No, only employers may make contributions to an HRA.

Is there a maximum (or minimum) amount that an employer may contribute each year?

No, there are no maximums or minimums set by the IRS. The employer may set any amounts it wants.

What are the timing requirements for the employer’s contributions?

Unlike FSAs, the full annual amount does not need to be available on the first day of the plan year (although the plan can be designed that way if the employer desires). The plan can be designed to accept employer contributions monthly, quarterly, or annually.

What can the funds in the HRA account be used for?

HRA monies may be used to reimburse medical expenses, as defined in Section 213 of the Internal Revenue Code. This includes diagnostic tests, treatment procedures, preventive care, provider and facility charges and dental and vision services. Over-the-counter drugs may be reimbursed from the HRA if the employer chooses to do this. Debit cards may be used with HRAs.

If the HRA is linked to a group health plan with a high deductible, the HRA often is limited to reimbursement of the deductible, co-pays and co-insurance.

What happens to unused monies at the end of the plan year?

Unlike FSAs, unused amounts may carry over from year to year.

What happens to unused monies if the employee terminates?

The employer may choose when they set up the plan whether to have terminating employees forfeit unused amounts when they leave, or to give terminating employees access to unused amounts. Furthermore, if the employer chooses, they can have a different approach for individuals who terminate due to retirement and individuals who terminate for other reasons.

Why would an employer want to allow terminating employees to have access to the unused funds?

If the HRA is set up in conjunction with a high deductible group health plan, with the goal of making participants more conscious about how they spend health care dollars, that goal is undermined if the employee knows that he may as well spend everything the employer contributes because he cannot take it with him.

What are the drawbacks to allowing terminated employees to retain their account?

The employer has a financial obligation to a non-employee. In addition, because the monies may only be used to reimburse qualifying medical expenses, and may never be paid out in cash, the employer will have administrative costs to maintain the account indefinitely.

May an employer offer both an HRA and FSA?

Yes, this is permitted. The HRA will pay first, unless the plan specifies that the FSA will pay prior to the HRA. If the HRA is written so that unused amounts carry over from year to year, the employer may want to have the HRA pay first to reduce the amount of the accumulation. One reason to have the FSA pay first is because unused FSA money does not carry over.

Or, the FSA can cover some expenses (e.g. dental, vision) and the HRA can cover others (medical deductible and office and drug co-pays).

May an employer offer both an HRA and an HSA?

Yes, but the HRA will then need to meet the requirements of a High Deductible Health Plan (no reimbursement until the high deductible is met), limit reimbursements to dental and vision, or defer reimbursements until retirement.

May premiums be reimbursed from an HRA?

Clearly, group health premiums may be reimbursed through an HRA. Long term care premiums may not be reimbursed through an HRA. It is unclear whether individual premiums may be reimbursed through an HRA (unless the individual premiums are that employer’s approach to providing health coverage to their employees).

What happens if an active employee becomes ineligible for the HRA (because, for example, he switches to a health plan option that does not include the HRA)?

The employer ceases contributions, but the employee’s account remains active and he may submit claims. (Unlike FSA’s, claims do not need to be incurred during the coverage period.)

Must COBRA be offered to terminating employees?

Yes, even if the plan does or does not give access to unused amounts in the HRA.

Currently, it is unclear how to determine what the COBRA premium should be; Nyhart’s approach is to determine the employer’s annual contribution, divide by 12, and charge that as the monthly COBRA premium, along with the administrative fee.

What other legal requirements apply to HRAs?

While administratively HRAs operate quite similarly to FSAs, legally they are considered a group health plan. This means that in addition to the true COBRA requirement, a Form 5500 is due each year if the plan has 100 or more participants, a plan document and summary plan description are required, and HIPAA certificates of coverage are needed.

May the self-employed, partners, and 2% Subchapter S shareholders participate in an HRA?

No. Only employees may participate in HRAs (which generally means individuals who receive W-2 income).

Do non-discrimination rules apply?

Yes, the Code Section 105(h) rules apply. Basically, eligibility for or contributions under the HRA cannot favor the highly compensated.