Health Reimbursement Arrangement Plans

We wanted to inform you of a new simplified method of covering your employee's out of pocket medical expenses (such as co-payments, prescription and non-prescription drug costs, etc.) by using what is referred to as a" Health Reimbursement Arrangement" (HRA). 

An HRA is a plan through which the Company agrees to reimburse it's employees for substantiated medical expenses without funding for full medical coverage. These plans are flexible and can limit the annual benefit if desired. If an HRA is established in accordance with the IRS rules, your employees will receive these benefits tax-free and the Company will get a tax deduction for the benefits. You can also use these plans to supplement other group health plans you provide to your employees, including high-deductible health plans. 

An HRA reimburses the employee for medical care expenses incurred by the employee and the employee's spouse and dependents. In addition to the usual medical expenses, such as amounts paid for the diagnosis, cure, mitigation, treatment or prevention of disease, and amounts paid for the purpose of affecting any structure or function of the body, they also include amounts paid for over-the-counter drugs. Over-the-counter drugs include most medicines purchased for the purpose of alleviating sickness or treating a personal injury, such as antacids, allergy medicine, pain relievers, and cold medicine. Dietary supplements, such as vitamins, which are merely beneficial to the employee's health but are not designed to treat a particular condition, are not considered qualifying drugs. Purchases for dietary supplements would, therefore, not be eligible for reimbursement under an FSA or HRA health plan.

Although the HRA may sound similar to a flexible spending account (FSA) for health care, it is very different. Three principle differences between a medical FSA and an HRA are: 

1. The employer doesn't specifically have to set funds aside for the employees. The employer can reimburse the medical expenses as the employee incurs these expenses. Reimbursement can be done through a monthly expense report where the employee would provide receipts for all the medical expenses listed. However, the IRS will not permit any form of employee contributions, whether they are salary reduction contributions or otherwise, to fund an HRA. 

2. There is no "use it or lose it" rule for HRAs-once you fund the HRAs, your employees do not have to use the money for medical expenses by the end of the year in which contributions are made as they do with a medical FSA. They can carry over employer contributions. 

3. You do not have to make the full annual contribution available to employees at the beginning of the year as you have to do with a medical FSA. You can fund these plans at regular intervals, such as each pay period. Because of this rule you won't lose money with an HRA as you can with an FSA when an employee leaves early in the year. 

There are a number of other requirements and rules for HRAs. We think that they have potential to provide a valuable benefit to both you and your employees. Please contact your engagement or Tax Partner for further information. 

Find out how our Boston Consulting, Accounting and Tax experts can add value to your business. Email us or call us at 1 (888) 875-9770.

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