Business owners like to provide some sort of health insurance benefits for their employees. But economic realities often make it difficult for businesses – especially small businesses – to find room in the budget for providing comprehensive group health insurance to their employees. Instead, a health reimbursement arrangement (HRA) might be exactly the right fit in a lot of situations.
IRS publication 969 explains the rules and regulations regarding HRAs, starting on page 17. An HRA is a funding method that allows employers to reimburse health care costs for their employees.
If you’re an employee who would like to request that your employer set up an HRA, you can request more information here.
If you’re an employer who would like to establish an HRA for your employees, go here to read more about the benefits an HRA provides to your business and find out how to set up an HRA.
HRAs provide an excellent opportunity for employers to reduce health care costs while still providing benefits to employees. An HRA can be set up in conjunction with a group high deductible health insurance policy, and the employer can fund the employees’ HRAs in order to reimburse expenses that are not covered by the health insurance policy. This combination is often much less expensive than a comprehensive, low deductible health insurance policy. For even more savings, an employer can opt to use an HRA to reimburse employees for premiums they spend to purchase their own individual health insurance policies.
HRAs allow employers to reimburse employees for qualified medical expenses, and contributions to an employee’s account are not included in the employee’s gross wages for tax purposes. Unlike a health savings account (HSA), employees are not allowed to contribute to their HRAs – funding is done completely by the employer. But the employer also has greater control over how the funds can be used, whether the funds can be rolled over from one year to another, and whether there will be a cap on the amount that can be reimbursed each year.
One of the most important advantages of HRAs is that there is no requirement that the plan be established in conjunction with a health insurance policy. So unlike HSAs, which require a qualified high-deductible health insurance policy, an employer can opt to set up an HRA without establishing a group health insurance policy for employees. And HRA funds can be used to reimburse employees for money they spend on their own individual health insurance policies. There is no legal requirement that HRAs be used in conjunction with health insurance policies, but employers can specify that employees must have their own health insurance policies in place in order to receive reimbursement – again, the HRA gives the employer a lot of flexibility and control in terms of how HRA funds can be used.
Employers can also reimburse their employees for medical expenses that are not covered by an employee’s health insurance, including any qualified medical expense on IRS publication 502.
Insurance Shoppers, Inc. does not provide tax or legal advice. Please consult with a qualified tax or legal professional if you have questions about your tax or legal situation.