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 Starting a Healthcare Reimbursement Account


Recently the IRS has cleared the way to allow employers to pay cash benefits for health care that carry balances over from year to year. These plans are called Healthcare Reimbursement Accounts (HRA). HRA plans offer significant advantages over earlier health plan designs including plans known as "Medical Reimbursement Plans", "Premium Only Plans", "Cafeteria Plans" and "Medical Savings Accounts". In oversimplified terms, the HRA allows an employer to take the position "if the money is used for health-related purposes, then it is not taxed as wages, regardless of other details".     

Employers and their benefits advisers are still experimenting with HRA designs that allow for the most flexibility at minimal cost. One of the biggest issues in starting a HRA plan is the decision of whether to use a "funded" or "unfunded" plan. In contrast to what the HRA name implies, most HRAs are not using an "account" setup in the way that we think of a 401(k)accounts or Medical Savings Accounts. HRAs without an account to hold contributions are known as "unfunded" plans. These are easier to setup and administer but can trigger a long-term financial liability for the employer that must be handled responsibly. Here are a few other issues that employers should consider when starting a HRA plan.

HRA Technical Brochure
HRA Points


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HRAs have nothing to do with health insurance. They can be used with or without insurance. The employer's decisions about health insurance should have no impact on the decision to use a HRA. 

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The employee may elect to use HRA to pay for health insurance. There is no requirement that employees have the same type of health insurance.

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If the employer starts a HRA plan, it usually makes sense to fund all employee health benefits through the HRA plan. It normally would not makes sense, for example, for an employer to have an employee benefit that provides for the employer to pay for health insurance and then, separately, a benefit that funds a HRA. For simplicity of operation and easier compliance with IRS participation rules, the two should probably be combined.

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An HRA requires a written document. There is no specific format required, but it makes sense to use a "tried and true" traditional benefit plan format utilized by benefit plan consultants. These documents are available at minimal cost.

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There is no requirement that an employer actually set up a separate account or trust to hold money from plan contributions.  In some cases this might be desired. If an account is used, it may use individual accounts for each employee or be a single "pooled account " for all employees.

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Small business HRAs may not require the filing of an annual tax return. If a plan can be designed to avoid an annual tax return, the employer will probably save $100 to $200 in annual tax return preparation fees.

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If the HRA does require an annual tax return, this is not a "do-it-yourself" project. In the event that there is an IRS issue in the future (this happens in about 1/2 of all employee benefit plans) the ability to show fair business intent through the use of independent accountant or adviser is more likely to help avoid an appearance of tax evasion. Since employee benefit plan rules change every year, it is smarter to spend the small amount to have an employee benefit specialist prepare the HRAs Form 550 report to the IRS.

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It is not difficult to justify the cost of starting a HRA plan. The average cost of setting up and running a small business HRA is about $500 per year. Each $1000 paid through a HRA will cost about $400 in wage taxes. (Remember that HRA contributions are not subject to federal or state income tax, social security tax or FUTA, unemployment wage tax or worker's compensation premiums), So the "breakeven" point for the plan is only about $1200 in total contributions for the year.

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One "hidden" but significant benefit of an HRA plan is that it allows employees to take advantage of less expensive individual health insurance plans that are not available through other employer-sponsored plans.  Of course, the employee receives the same tax-free status as with group insurance plans. The employer should be aware that some states have insurance laws designed to make it difficult to exploit this loophole, and the employer should be careful to comply.

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Like many other employee benefit plans, the best results will be obtained if the HRA is custom-designed for the individual business rather than use a "one-size-fits-all" approach. But this means working with a benefits adviser who takes the time to learn the needs of your business and builds the best-suited features into the new HRA plan.

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