Tax-advantaged health reimbursement arrangement for employees

ARTICLE | April 24, 2023

Authored by RSM US LLP

Many employers want to provide financial assistance to employees for health insurance premiums and other medical expenses. Health reimbursement arrangements (HRAs) are plans sponsored by employers which provide tax-free money to employees for these costs. HRAs can be an important component of an employer’s benefit package for attracting and retaining employees.

Background

In 2013, the IRS determined that certain premium reimbursement plans, healthcare reimbursement arrangements, and other types of medical expense reimbursement plans offered by employers to help employees pay for health insurance premiums or medical expenses did not comply with the Affordable Care Act. To avoid an excise tax of $100 per affected person per day, many arrangements were terminated. Starting in 2016, Congress began enacting legislation to authorize HRAs that are not subject to the excise tax if they comply with governing rules.

1) QSEHRAs

Qualified small employer health reimbursement arrangements (QSEHRAs) are only available to small employers with fewer than 50 full-time and full-time equivalent employees. Furthermore, only small employers that do not have a group health plan or other types of medical program can establish a QSEHRA. Through a QSEHRA, employers can reimburse employees for health insurance premiums and medical expenses. The IRS sets dollar limits on the employer contributions to these arrangements. For more details about QSEHRAs, see our article Qualified small employer health reimbursement arrangements (rsmus.com).

2) ICHRAs

Individual coverage HRAs (ICHRAs) can be offered by any size employer to employees who purchase health insurance on their own directly from an insurance company or through the Health Insurance Marketplace (also called the Exchange). These HRAs typically offer more flexibility than QSEHRAs and there are no IRS dollar limits on employer contributions.

3) EBHRAs

Excepted benefit HRAs (EBHRAs) can be used by any employer that offers a traditional group health plan. The HRA can be designed to pay for certain medical expenses for employees who enroll in or opt out of the employer’s plan. The IRS limits contributions to the EBHRA.

4) Integrated HRAs

Integrated HRAs can be provided by any employer with a traditional group health plan to help enrolled employees with medical expenses not covered by the plan, such as deductibles. The rest of this article provides more details about integrated HRAs.

Integrated HRAs

Eligibility

Any employer that sponsors a group health plan can offer an integrated HRA. Only employees enrolled in the employer’s group health plan (or in another group health plan such as a spouse’s employer’s plan) are permitted to participate in the HRA.

Contributions

An integrated HRA is funded entirely by the employer, and the employer has discretion to determine the maximum dollar amount that it wants to contribute for a year for each employee. Because HRAs are subject to nondiscrimination rules, employers generally need to have the same contribution limit for all employees.

Employers offering HRAs typically have a group health plan with a higher deductible and use the HRA to fund all or part of that deductible. Therefore, employers set the HRA contribution limit based on the deductible of the group health plan. Because the deductible is higher, the premiums for the group health plan are lower thus saving both the employer and the employees money.

Although HRAs are account-based health plans, employers are not required to fund them through a separate plan account or trust. Instead, employers can pay employees’ medical expenses from their general assets as they are incurred and provided to the HRA for payment.

Reimbursements

In order to receive funds from an integrated HRA, an employee or the employee’s medical provider (doctor, hospital, etc.) must submit claims to the administrator of the HRA. Employers typically hire a third-party administrator to process claims and keep records of each employee’s unused account balance during the year. At the option of the employer, unused amounts in the HRA can roll over from year to year. Unused amounts cannot be paid to employees in cash.

Claims may be submitted for a wide variety of medical expenses allowable under the IRS rules. The HRA can cover expenses incurred by employees and their spouses and children under the age of 27.

ERISA

An HRA is an employer-sponsored plan subject to ERISA unless an exemption applies, such as for church or governmental plans. ERISA is a federal law that governs employee benefit plans and requires written plan documents, disclosures to plan participants, governmental filings for certain plans (Form 5500, Annual Return/Report of Employee Benefit Plan) plus other provisions.

Reporting

Employers offering an integrated HRA are required to file an annual Form 1095-B or Form 1095-C to the IRS and provide a copy to employees. In addition, they will need to file an annual Form 720, Quarterly Federal Excise Tax Return, by July 31 each year to report and pay the Patient-Centered Outcomes Research (PCOR) fee.