CARL WATTS & ASSOCIATES

April 24, 2017

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Health Reimbursement
Arrangements
In this special miniseries of newsletters dedicated to health spending programs, it is now the health reimbursement arrangements’ turn to be the star of the show.

In a nutshell, the Health Reimbursement Arrangement (HRA) is apart from the other health spending programs in that it must be funded solely by an employer. The contribution can’t 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.

Following implementation of the Affordable Care Act, the health plans must be integrated with a qualified employer-sponsored group health insurance plan to avoid excise tax penalties. Using a Health Reimbursement Arrangement yields tax advantages to offset health care costs for both employees and employers.

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:


  • 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.

Being an employer-established benefit plan, the HRA 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 aren’t eligible for HRAs.

Certain limitations may apply if you are a highly compensated participant.

HRAs are funded solely through employer contributions and may not be funded through employee salary deferrals under a cafeteria plan.

These contributions aren’t included in the employee's income. You don’t pay federal income taxes or employment taxes on amounts your employer contributes to the HRA.

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.

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. 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:

  1. Current and former employees.

  2. Spouses and dependents of those employees.

  3. Any person you could have claimed as a dependent on your return except that:

    - The person filed a joint return,
    - The person had gross income of $4,050 or more, or
    - You, or your spouse if filing jointly, could be claimed as a dependent on someone else's return.

  4. Your child under age 27 at the end of your tax year.

  5. Spouses and dependents of deceased employees.



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 claims must be described in the HRA plan document at inception before reimbursing employees for the 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 kinds of expenses that can be paid under an HRA are generally the same as the expenses that can be paid through a Flexible Spending Account.

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: (a) requires a prescription, (b) is available without a prescription (an over-the-counter medicine or drug) and you get a prescription for it, or (c) is insulin.


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.

If coverage is provided under both an HRA and a health FSA for the same medical care expenses, amounts available under an HRA must be exhausted before reimbursements may be made from the FSA.

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.

On December 13, 2016, Congress enacted the 21st Century Cures Act, which permits an eligible employer to provide a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), which is not a group health plan and thus is not subject to the requirements that apply to group health plans.

Business are qualified to offer the new HRA if they have 50 or less full-time employees (equivalent FTE employees) and do not offer employer sponsored group health insurance.

A QSEHRA is an arrangement that meets the following criteria:

  1. The arrangement is funded solely by an eligible employer, and no salary reduction contributions may be made under the arrangement;

  2. The arrangement generally is provided on the same terms to all eligible employees of the employer;

  3. The arrangement provides, after the employee provides proof of coverage, for the payment or reimbursement of medical expenses incurred by the employee or the employee’s family members; and

  4. The amount of the payments and reimbursements for any year do not exceed $4,950 for employee-only arrangements or $10,000 for arrangements that provide for payments and reimbursements of expenses of family members. These maximum dollar amounts are adjusted for inflation after 2016. (Amounts are the same for 2017)

All employees of the employer must be covered by the QSEHRA, unless they have not completed 90 days of employment, are under the age of 25, are part- time or seasonal employees.

Employers must notify employees at least 90 days prior to the start of the plan year or within 90 days of the date that new employees become eligible.

The employer must report the total amount of permitted benefit for the year on employees’ Forms W-2.

Although the new provisions were made available for plan years beginning after December 31, 2016, they came too late for most employers to implement for the 2017 plan year. However, it should be useful for subsequent years by providing increased flexibility for qualifying employers who want to provide health benefits to their employees without having to establish an expensive companion health plan.

If you are an employee, make sure you check with your employer to find out all the details of the health spending plan you are being offered, especially considering the new applicable rules. And, of course, make sure you check with your tax professional to find out what your responsibilities are in any dealings involving taxes and income reporting requirements.



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