Health reimbursement arrangements - questions and answers

Health Reimbursement Arrangements (HRAs) are often an excellent option for employers who contribute a large portion of their employees' health premiums. We've saved multiple employers a substantial amount of premiums since 2002 by combining high deductible health plans with IRS-sanctioned HRAs.

We've included some frequently asked questions and answers below. Simply click on any question that interests you to see the answer. For any other questions, please contact Jason Mackey, the managing partner in our Charleston office, at jason@mackeyonline.com or 843.729.5597.

How can I save money with an HRA?
You can raise the deductible on the health insurance plans you offer, which will lower your organization's monthly insurance premiums. You can then offer an HRA to reimburse your employees for all or part of the increased deductible if they end up having a claim.
Will my employees have to pay taxes on the reimbursement?
Two significant benefits of health reimbursement accounts are that (a) the expense is deductible for the employer, and (b) the employee does not have to recognize the reimbursement as income and therefore does not have to pay taxes on the reimbursement.
Can I choose what the HRA covers?
Yes; in fact, that's one of the reasons many employers like health reimbursement accounts. You can include benefits your health plan does not cover, like deductibles, co-pays, vision care, dental expenses, and so on, as long as they're qualified Section 213d expenses.
Do I have to fund the accounts at the beginning of each year?
The program is an unfunded liability, which means there is no requirement that the entire annual allocation be made on the first day of the plan year. HRA funding can be made all at once or in equal portions throughout the year.
What happens if I have unused funds at the end of the year?
You can keep the money to offset future medical plan increases or you can allow employees to carry over some or all of their unused balances.
Can an employer just decide to start an HRA plan and begin reimbursing expenses?
You can start an HRA at any time. You can have a short coverage period to coordinate your HRA with other benefits if needed, and you can have the coverage period coincide with either your fiscal year, calendar year or health plan. An HRA plan is easy to implement but it is an IRS monitored program, so you'll need some basic administration and documentation to be in compliance.

For instance, you'll need an IRS-approved plan document, and you must distribute a Summary Plan Description to each plan participant. You'll also need to provide COBRA continuation forms to HRA participants who incur COBRA-qualifying events, and you'll need to comply with certain rules; for instance, your HRA cannot discriminate in favor of highly compensated employees, and if your organization has more than 100 HRA participants, you must file an IRS Form 5500 each year.
Can any employer sponser a Health Reimbursement Arrangement?
Regular corporations, partnerships, S corporations, limited liability companies, sole proprietors, and professional corporations can all implement health reimbursement arrangements. However, if your current health insurance has a return-of-premium feature, it cannot be paid for with HRA funds.
Can anyone participate?
The regulations prohibit sole proprietors, partners, members of an LLC (in most cases), individuals owning more than 2% of an S corporation, or their spouse and dependents from participating, but they can still sponsor a plan and benefit from the savings on payroll taxes.
Are there any limitations when it comes to HRAs?
Yes. First, you're required to pay eligible healthcare expenses only to the extent of an individual’s account balance. Second, eligible expenses must be incurred during the participant’s period of coverage, although it may be paid at a future date. (This is determined by the plan design.) And finally, HRA balances cannot be "cashed out" by an employee upon termination or retirement.