What is an HRA?

The BASIC HRA is a Section 105 Health Reimbursement Arrangement (HRA).  It is based on Section 105 & 106 of the Internal Revenue Code.  On June 26, 2002 the Treasury Department and IRS released guidance (a notice and a revenue ruling) on these sections of the code that were established in the 1950’s.  This guidance created the new name Health Reimbursement Arrangement which provides employer funded reimbursement of qualified employee and family health care costs.

"With this new guidance, we clear the way for employers to adopt health plans with patient-directed features so that employees have more choice and greater control over their health care coverage," stated Treasury Secretary Paul O’Neill.

According to the IRS, an HRA is described as:

An HRA is an arrangement not an account.  The use of the term “arrangement” is deliberate and meaningful.  Why?  If the term used was Health Reimbursement Account this would imply to the participant – my money.  The term arrangement means simply that the employer will reimburse defined out-of-pocket costs after they are incurred.

Key Rules

1. It is paid for solely by the employer and cannot be provided through a salary reduction election or otherwise under a § 125 cafeteria plan;

2. Reimburses the employee for health care expenses (as defined by § 213(d) of the Internal Revenue Code) incurred by the employee and the employee’s spouse and dependents (as defined by § 152); and

3. Provides reimbursements up to a maximum dollar amount for a coverage period and any unused portion of the maximum dollar amount at the end of a coverage period can be carried forward to increase the maximum reimbursement amount in subsequent coverage periods. 

4. To the extent that an HRA is an employer-provided accident or health plan, coverage and reimbursement of medical care expenses of an employee and the employee’s spouse and dependents are generally excludable from the employee’s gross income under §§106 and 105.

5. An arrangement is not treated as an HRA if the arrangement interacts with a cafeteria plan in such a way as to permit employees to use salary reduction indirectly to fund the HRA.

What Benefits can be offered under an HRA?

1. Health care expenses as defined by IRC Section 213(d) all or in part.

2. Amounts paid for accident or health coverage for

a. Current employees and qualified dependents

b. Retirees and spouse

c. COBRA qualified beneficiaries

d. Be cautious when allowing reimbursement of health premiums in an HRA. Violations may arise from HIPAA issues and indirect salary reductions funding of the HRA.

e. If any person has the right to receive cash or any other taxable or non-taxable benefit under the arrangement other than the reimbursement of medical care expenses, all distributions to employees for the current year become taxable.

Some additional considerations

HRA reimbursements are available to “employees” as defined by Section 401(c).  Therefore, members of a partnership, sole proprietors, 2% and more stockholders in a Sub-Chapter S Corporation are excluded from an HRA.

An HRA is generally a COBRA eligible benefit for COBRA qualified beneficiaries.

An HRA can be funded under an employer defined schedule.  HRA’s do not have to comply with the uniform coverage rule like a Section 125 Flexible Spending Account (FSA).

The HRA plan document defines eligibility, what health expenses are reimbursable, how many dollars are available to each class by family status or FTE (full time equivalent) and when reimbursement is provided.

Because HRA’s provide very broad latitude in plan design, serious consideration of the following process will help ensure the best possible experience.

• Development: Establish a clear sense of objectives to accomplish with an HRA.  This will help determine the plan design.
• Simplicity:  Adopt the simplest plan design to accomplish the objectives.
• Education:  Commit to fully educating covered employees about the rationale for and use of the HRA.  Inadequate education can significantly increase participant confusion.  As a new element of a benefit package there is always a learning curve.  Good education makes this learning curve much softer.
• Review:  Monitor the use of the HRA over the plan year to learn what modifications in plan design and administration processes will improve the HRA.

Contact our HRA department.
888-HRA-0777
888-472-0777
hra@basiconline.com