Health Reimbursement Accounts, also known as HRAs, are a type of health care benefit that can be offered to employees and their dependents. These employer-funded accounts are used to reimburse eligible medical expenses. All reimbursements are excluded from the employee’s taxable income and are deductible by the employer. However, to participate in a traditional HRA, the employee has to be enrolled in a group health insurance program offered by the employer. In June 2019, regulations were released that established two more types of HRAs, creating more flexibility regarding who can offer and who can enroll in Health Reimbursement Accounts, starting in 2020.
Individual Coverage Health Reimbursement Accounts (ICHRA)
The ICHRA is an HRA that allows employees with individual health insurance or Medicare coverage to enroll in an HRA. However, there are several requirements that must be met by the employer to offer this medical plan:
- All members using the HRA must be covered by their own health insurance plan.
- Employees who are enrolled in employer-offered group health insurance cannot participate.
- The employer contribution offer cannot vary for employees within the same class (full-time, part-time, seasonal, salaried, etc.) and can only vary based on an employee’s age and family size.
- Employers must substantiate an employee’s claim of coverage at the beginning of every year and again whenever a reimbursement claim is made.
- Employees must be given the opportunity to opt out of participating because a taxpayer cannot claim the premium tax credit while participating in an ICHRA. This election is made on an annual basis.
- Employers must notify employees of the ICHRA terms at least 90 days prior to the plan year. Those employees who become eligible during the year must be notified no later than the day they become eligible.
- When an employer offers an ICHRA to its employees, it is considered a minimal essential coverage offer. To avoid employer mandate penalties, the benefit of the ICHRA has to be affordable to the employee, as defined by the IRS.
Excepted Benefit Health Reimbursement Accounts (EBHRA)
EBHRAs were created as another form of employer-offered health benefit that does not require you to sacrifice your individual health coverage. Employer contributions are limited to $1,800 for 2020 with remaining year end balances carrying forward. Reimbursements from an EBHRA are not limited to excepted benefits (items not usually covered by traditional health insurance, like vision coverage and dental coverage). Employers must offer a traditional group health plan in order to offer an EBHRA; however, employees are not required to enroll in the group health plan to enroll in the EBHRA.
Vision and dental insurance premiums, COBRA coverage, short-term limited duration insurance, copays/deductibles, and long-term care coverage are all reimbursable expenses under an EBHRA. Insurance premiums and group health insurance premiums are not covered. Additionally, EBHRAs do not meet the minimum essential coverage threshold, meaning that participants might still be able to claim the premium tax credit, depending on their individual circumstances.
An EBHRA is another form of HRA that allows employees to have certain out-of-pocket medical expenses reimbursed, even though they have individual health insurance coverage.
How Does this Affect You?
Why does this matter? HRAs have the potential to save employees money on health costs and allow employers to offer a more comprehensive health care package, potentially combining the benefits of an HRA and an individual health plan.
Employers and employees of companies that offer an HRA should be aware of the options for the upcoming year, as well as the benefits and requirements listed above to determine if offering or participating in an HRA, ICHRA, or EBHRA is the right choice to supplement current health care benefits. If you need help deciding the right choice for your company, contact us.
Written by Danielle Gollehon
Danielle Gollehon joined Thompson Greenspon as a Tax Staff Accountant in August 2019. She provides tax preparation and tax planning services for both individual and business clients throughout the year. She is working towards developing a tax specialization in construction.
Danielle attended The Ohio State University and graduated in August 2019 with a BSBA with a specialization in accounting. She is currently in the process of taking the CPA exam to become a Certified Public Accountant.
Danielle is a member of the American Institute of Certified Public Accountants and the Virginia Society of Certified Public Accountants.