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There is one more health spending account that needs to be added to our mini-series so you can be fully informed of all the existing options out there in the employment sector.
The Health Reimbursement Arrangement (HRA) is, in a nutshell, an IRS-approved, employer-funded, tax-advantaged health benefit used to reimburse employees for out-of-pocket medical expenses and personal health insurance premiums.
An HRA must be funded solely by an employer. The contribution cannot be paid through a voluntary salary reduction agreement on the part of an employee. Employees are reimbursed tax free for qualified medical expenses up to a maximum dollar amount for a coverage period. An HRA may be offered with other health plans, including FSAs.
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Unlike HSAs or Archer MSAs, which must be reported on Form 1040 or Form 1040NR, there are no reporting requirements for HRAs on your income tax return.
You may enjoy several benefits from having an HRA.
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- Contributions made by your employer can be excluded from your gross income.
- Reimbursements may be tax free if you pay qualified medical expenses.
- Any unused amounts in the HRA can be carried forward for reimbursements in later years.
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As employer-established benefit plans, HRAs may be offered in conjunction with other employer-provided health benefits. Employers have complete flexibility to offer various combinations of benefits in designing their plan.
Self-employed persons are not eligible for HRAs.
There is no limit on the amount of money your employer can contribute to the accounts. Additionally, the maximum reimbursement amount credited under the HRA in the future may be increased or decreased by amounts not previously used.
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Generally, distributions from an HRA must be paid to reimburse you for qualified medical expenses you have incurred. The expense must have been incurred on or after the date you are enrolled in the HRA.
Debit cards, credit cards, and stored value cards given to you by your employer can be used to reimburse participants in an HRA. If the use of these cards meets certain substantiation methods, you may not have to provide additional information to the HRA.
If any distribution is, or can be, made for other than the reimbursement of qualified medical expenses, any distribution (including reimbursement of qualified medical expenses) made in the current tax year is included in gross income. For example, if an unused reimbursement is payable to you in cash at the end of the year, or upon termination of your employment, any distribution from the HRA is included in your income.
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This also applies if any unused amount upon your death is payable in cash to your beneficiary or estate, or if the HRA provides an option for you to transfer any unused reimbursement at the end of the year to a retirement plan.
If the plan permits amounts to be paid as medical benefits to a designated beneficiary (other than the employee’s spouse or dependents), any distribution from the HRA is included in income. Reimbursements under an HRA can be made to the following persons.
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- Current and former employees.
- Spouses and dependents of those employees.
- Any person you could have claimed as a dependent on your return except that:
a. The person filed a joint return,
b. The person had gross income of $4,150 or more, or
c. You, or your spouse if filing jointly, could be claimed as a dependent on someone else’s return.
- Your child under age 27 at the end of your tax year.
- Spouses and dependents of deceased employees.
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For this purpose, a child of parents that are divorced, separated, or living apart for the last 6 months of the calendar year is treated as the dependent of both parents whether or not the custodial parent releases the claim to the child’s exemption.
Qualified medical expenses are those specified in the plan that generally would qualify for the medical and dental expenses deduction. Also, non-prescription medicines (other than insulin) aren’t considered qualified medical expenses for HRA purposes.
A medicine or drug will be a qualified medical expense for HRA purposes only if the medicine or drug requires a prescription, is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it, or is insulin.
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Qualified medical expenses from your HRA include the following:
- Amounts paid for health insurance premiums.
- Amounts paid for long-term care coverage.
- Amounts that aren’t covered under another health plan.
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You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the distribution from the HRA.
Amounts that remain at the end of the year generally can be carried over to the next year. Your employer isn’t permitted to refund any part of the balance to you. These amounts may never be used for anything but reimbursements for qualified medical expenses.
An HRA plan is an especially good option for small businesses that cannot afford to offer group health insurance, as the business can choose the amount of the allowance to offer its employees. A small business is considered to be a business with fewer than 50 full-time employees.
Apart from the general HRA rules, the qualified small employer health reimbursement arrangement (QSEHRA), also called a small business HRA, comes with annual contribution limits.
For tax years beginning in 2019, small businesses can offer up to $5,150 for self- only employees and $10,450 for employees with a family.
On June 13, 2019, the IRS, the Department of Labor, and the Department of Health and Human Services issued final rules regarding health reimbursement arrangements and other account- based group health plans.
Specifically, the final rules allow HRAs and other account-based group health plans to be integrated with individual health insurance coverage or Medicare, if certain conditions are satisfied (an individual coverage HRA).
The final rules also set forth conditions under which certain HRAs and other account-based group health plans will be recognized as limited excepted benefits (an excepted benefit HRA).
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An Individual Coverage HRA is funded exclusively by the employer and may reimburse employees for medical care expenses, including individual market health insurance premiums. An Individual Coverage HRA must be offered on the same terms to all individuals within a class of employees, except that the amounts offered may be increased for older workers and for workers with more dependents.
An Excepted Benefit HRA means that an HRA can be offered as an “excepted benefit” by an employer. An “excepted benefit” is an insured or self-insured plan that meets certain requirements but is usually not integral to a major medical health plan.
An Excepted Benefit HRA can be used to reimburse medical care expenses in addition to other excepted benefits. The HRA itself is considered an excepted benefit because it is neither integral to a health plan nor is it a health plan itself.
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To qualify as excepted benefits:
- The annual HRA contribution for 2020 must be limited to $1,800 per year (indexed for inflation beginning in 2021);
- The HRA must be offered in conjunction with a traditional group health plan, although the employee is not required to enroll in the traditional plan;
- The HRA cannot be used to reimburse individual health insurance premiums, group health plan premiums (other than COBRA), or Medicare premiums, although it can reimburse premiums for excepted benefits, such as dental and vision coverage, as well as for Short-Term, Limited Duration Insurance (STLDI);
- The HRA must be uniformly available to all similarly situated individuals (as defined under the Health Insurance Portability and Accountability Act, which generally permits bona fide employment-based distinctions unrelated to health status).
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Employers can start offering Individual Coverage HRAs and Excepted Benefit HRAs on January 1, 2020.
Employers that offer an Individual Coverage HRA must notify eligible employees regarding the availability of the HRA and how participating in the HRA impacts their eligibility for the premium tax credit. Employers are also obligated to substantiate that Individual Coverage HRA enrollees and their families are enrolled in individual health insurance (or Medicare).
If an employer wants to offer an Individual Coverage or Excepted Benefit HRA, it is suggested to consult with qualified ERISA counsel. The Employee Retirement Income Security Act of 1974 (ERISA) is a federal law that sets minimum standards for most voluntarily established retirement and health plans in private industry to provide protection for individuals in these plans.
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There are additional requirements and guidelines an employer will need to meet in order to comply with the final rule. Special enrollment periods may need to be established in order to allow employees and employers to take advantage of the final rule. The Departments and other federal government agencies, including the IRS, will issue further guidance regarding this rule. Such guidance will be necessary in order to correctly implement either type of HRA under the final rule.
As stated at the beginning, our mini-series dedicated to tax-advantaged health benefit accounts ends here, but don’t forget to check our future newsletters for information and updates on this topic, as well as on many other topics of interest particularly from the taxation point of view.
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