Here at AHR, we get questions about Health Reimbursement Accounts that range from A all the way down to Z. We thought it would be great to share some insight and answers with you, to some of the 5 most frequently asked questions we receive. So let’s dive in!
- What is an HRA?
A Health Reimbursement Arrangement (HRA) is an employer-sponsored plan that can be used to reimburse some or all employee out-of-pocket medical expenses, such as deductibles, coinsurance and pharmacy expenses. This employer funded financial reimbursement plan is open to employees and their family members.
An HRA is based on Section 105 of the IRS tax code, and is sometimes called a Section 105 Plan, or a Medical Reimbursement Plan (MRP). When paired with a high deductible health plan (HDHP), employers have greater flexibility and save more money.
- How much can you save by switching to a HDHP and HRA?
It depends on the type of group insurance policy you have. If you have a standard, fully funded insurance policy, you can generally expect to save about 15% the first year. If you have a level-funded or self-funded policy, you could save 30% or more! Most importantly, the savings get bigger each subsequent year, because future premium rate increases depend on last year’s claims and premiums. Over time, the savings really add up!
- How does the HRA work with health insurance or a GHP?
An HRA is money from the employer that employees can use to pay for some or all of their deductible and out-of-pocket medical expenses. After the doctor/clinic/hospital files a claim with the health insurance or Group Health Plan (GHP), the employee will receive an explanation of benefits that shows how much they owe. They then use their HRA to pay that amount!
- Why can’t employers administer HRAs themselves?
HRAs provide small and middle-sized businesses an affordable, sustainable health benefits solution. However, HRA administrative rules are complex and it’s rarely wise for an employer to administer an HRA on their own. In order to administer an HRA, businesses need to have legal HRA Plan Documents in place. An HRA Plan document is subject to ERISA requirements and explains the HRA plan’s terms and conditions related to the operation and administration of the HRA. Additionally, a business must comply with the data security and confidentiality requirements of HIPAA (locked rooms and file cabinets, controlled access, data encryption, designated HIPAA Compliance Officer, etc.), and also comply with IRS, PCORI and ACA rules. Compliance laws are complex and the penalties for violations are severe, and that’s why most businesses find it more affordable and simpler to use a qualified third party to administer the HRA.
- What are the tax incentives for both the employer and employee?
The HRA is a tax-advantaged benefit that allows the employer’s contributions to the plan to be classified as 100% tax deductible to the employer. Also, HRAs are 100% tax-free to the employee. HRA reimbursements are excluded from employees’ gross income. However, it is important to note that certain business owners have limited tax advantages with HRAs. For example, C-Corp owners may participate in an HRA and receive all HRA reimbursements 100% tax-free. However, Sole Proprietors, Partners, or S-Corp shareholders that own >2% of the company’s shares most often will not receive reimbursements tax-free. These Non-C-Corp owners can use the HRA platform to reimburse and track medical expenses. However, HRA reimbursements must be reported on the owners’/partners’ wages (on their W-2 and 1040 forms) and are subject to federal income taxes.
These inquiries are the basics, but we can also answer technical questions for you. Reach out to us- expert answers to your questions are always just a call or email away!