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Health Reimbursement Accounts/Arrangements

Health Reimbursement Accounts (HRA’s) are IRS sanctioned programs that allow an employer to set aside funds to reimburse medical expenses paid by participating employees. Using an HRA yields "tax advantages to offset health care costs" for both employees as well as an employer.

HRAs are initiated by the employer and serviced by a third-party administrator or plan service provider. The employer may provide in the HRA plan document that a credit balance in an employee's HRA account can be rolled over from year to year like a savings account. The employer decides if the funds are rolled from year to year and how much rolls over (which can be either a flat amount or a percentage).

HRA "must be funded solely by an employer," and contributions cannot be paid through a voluntary salary reduction agreement. There is no limit on the employer's contributions, which are excluded from an employee's income.

Employees are reimbursed ‘tax free’ for qualified medical expenses up to a maximum dollar amount for a coverage period HRAs reimburse only those items agreed to by the employer which are not covered by the Company's Insurance Plan (any health insurance plan, not only not only high deductible plans (see IRS Section 105).

With an HRA, employers fund individual reimbursement accounts for their employees and define what those funds can be used for  i.e., specified out-of-pocket expenses such as deductibles and co-pays.

Qualified claims must be described in the HRA plan document at inception, i.e., before reimbursing employees for those medical expenses. Arrangements(medical services, dental services, co-pays, coinsurance, deductibles, participation) may vary from plan to plan, and an employer may have multiple plans in place, allowing much flexibility.

The employer is not required to pre-pay into a fund for reimbursements, instead, the employer reimburses employee claims as they occur.

Self-employed persons are ineligible.

"Highly compensated" participants may be subject to certain limitations.

More information at  http://www.irs.gov/publications/p969/ar02.html