There is an IRS-approved conduit for deducting medical expenses as business expenses, which is known as a Health Reimbursement Arrangement (HRA). An HRA is a system in which the business reimburses its employees for medical expenses. The employer sets the terms of what will be reimbursed and is fully responsible for its funding (no employee contributions are allowed). Any reimbursements made for qualified medical expenses are deductible expenses for the business.
Health Reimbursement Arrangements
Health reimbursement arrangements, also known as “health reimbursement accounts” or “personal care accounts,” are a type of health insurance plan that reimburses employees for qualified medical expenses. HRAs consist of funds set aside by employers to reimburse employees for qualified medical expenses, just as an insurance plan will reimburse covered individuals for the cost of services incurred. HRAs are considered to be Group Health Plans (GHPs) and thus HRA coverage is subject to Section 111 Medicare Secondary Payer (MSP) Reporting.
What are Health Reimbursement Arrangements?
Health Reimbursement Accounts are funded solely by the employer, and cannot be funded through employee salary deductions. The employer sets the parameters for the Health Reimbursement Accounts, and unused dollars remain with the employer – they do not follow the employee to new employment.
Benefits of HRA Program
There are two major tax benefits to using an HRA program. First, medical expenses are deductible from the first dollar spent and not limited by the 7.5% or 10% of AGI floor normally placed on medical expenses claimed as an itemized deduction. Second, for self-employed individuals the deduction reduces income taxes and self-employment taxes, whereas the itemized deduction would not reduce the self-employment tax.
Contributions to Health Reimbursement Accounts HRA
Health Reimbursement Accounts are notional accounts; no funds are expensed until reimbursements are paid to the employee Through health reimbursement arrangements, employers reimburse employees directly only after the employees incur approved medical expenses.
What is limit on contributing to Health Reimbursement Arrangements?
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. See Balance in an HRA , later. According to the IRS, an HRA “must be funded solely by an employer,” and contributions cannot be paid through a salary reduction agreement. There is no minimum or maximum contribution limit on the employer’s contributions to an HRA.
HRA coverage may exist in addition to a standard GHP. HRA coverage must be reported in addition to any other applicable GHP coverage. An RRE may need to submit two MSP Input File Detail Records for an individual. Two records are required when the RRE provides both standard GHP coverage and an HRA.
RREs are required to include HRA coverage in Section 111 reporting. The Effective Date submitted on the HRA MSP Input File Detail Record should be the HRA’s plan anniversary or renewal date. Retroactive reporting of HRA coverage is not required. 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.
New enrollees should be reported as soon as possible after their Effective Date. Recall however, CMS does not consider a record to be submitted late if the Effective Date of the HRA plan is within the 45 day period prior to the RRE’s assigned submission period and the record is not reported in that period. The record may be submitted in the next scheduled Benefits Coordination & Recovery Center (BCRC) assigned reporting period.
Distributions from HRA
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. A health reimbursement arrangement may reimburse any expense considered to be a qualified medical expense under IRS Section 213 of the Code, including premiums for personal health insurance policies. Within IRS guidelines, employers may restrict the list of reimbursable expenses in any way they choose.
How much to take out from Health Reimbursement Arrangement?
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.