A health reimbursement arrangement is an employer established benefit plan for employees, which is different from an MSA or HSA. Under the plan, an employer reimburses a participating employees qualified medical expenses up to a maximum dollar amount specified in the HRA plan agreement for the coverage period.
Unlike an MSA or HSA which require contributions and distributions to be reported on employee’s federal tax returns, there is no tax reporting requirements for an HRA.
Health Reimbursement Arrangement Benefits
HRAs offer tax and other benefits to plan participants and employers. The benefits include the following:
1. Reimbursements of qualified medical expenses are tax deductible to the employer
2. Contributions by the employer to an HRA are not includable in the participants income
3. Employer qualified medical expenses reimbursements are tax free to the employee
4. Available reimbursement amounts that remain unused at the end of the year may be carried over to the following years
5. HRAs have the ability to be used with other employer provided health benefits
Only an employer may establish an HRA, and such plans may be offered by an employer along with other employer provided health benefits. An employer who offers an HRA to its employees has complete flexibility with respect to its benefits and maximum reimbursement amount per coverage period.
An employee who is covered under an HRA is not required to be covered under any other health plan in order to participate in an HRA. Self employed persons are ineligible for establishing and using an HRA with one exception. If a self employed individual legitimately employs his or her spouse, the self employed person can be covered as a dependent under an HRA.
Funding an HRA may be done only through employer contributions. An HRA may not be funded by an employee by direct contributions or through employee salary deferrals under a cafeteria plan or other plan. There is no limit to the amount of contribution an employer may make to an employee’s HRA plan.
Distributions from an HRA may only be made to reimburse plan participants for qualified medical expenses that are incurred by the participant on or after the date enrolled in the HRA. These reimbursements can be made to the following individuals:
1. The current or former employees
2. Spouse and dependents of current or former employees
3. Any person the taxpayer could have claimed as a dependent on their tax return
4. The taxpayer’s child for which is under the age of 27
5. Spouses or dependent of deceased employees
When distributions are made as a reimbursement of qualified medical expenses, such distributions are not normally includible in the income of the participant of the HRA.