HRA: A health reimbursement arrangement (HRA) is an employer sponsored plan that reimburses the cost of qualified medical expenses incurred by the employee. Similar to n accountable plan, the employee submits receipts to the employer for proof of medical costs, and the employer reimburses the employee for such costs up to a maximum dollar amount per year. If the expense qualifies under IRC section 213 as a qualified medial expense {expenses that otherwise qualify as medical expenses on Schedule A (Form 1040)}, the reimbursement is excluded from the employee’s compensation under IRC section 105(b). HRAs can be used to help the employee pay for deductibles and co-pays. As well as the cost of medical insurance premiums.

Example #1: Ben has 2 employees and provide each employee with an HRA in which he reimburses up to $4000 per year of their medical costs. Employees can use the $4000 to purchase their own health insurance policy, and/or use it to cover out-of-pocket expenses such as deductible and co-pays that are not covered by health insurance. The reimbursements are deductible by Ben as an employee fringe benefit, and tax free to Ben’s employees.

Market Reforms: Under the market reform rules of the Affordable Care Act (ACA), a group health plan with 2 or more participants cannot establish lifetime or annual limits on the dollar amount of benefits for any individual participant in the plan. This rule basically was designed to prevent insurance companies from limiting the amount of medical expenses in which they would cover. However, the rules also apply to employer provided group health plans. The IRS issued regulations that stated any HRA in which an employer reimburses an employee’s medical costs, including the employee’s cost of health insurance premiums, would violate the market reform rules because the annual benefit under the plan is limited.

Example #2: Assume the same facts as Example #1. Under the market reform rules, Ben’s HRA is an employer group health plan because it covers more than one employee. As an employer group health plan, it is in violation of the prohibition on placing an annual limit on health benefits because the HRA reimburses no more than $4,000 per employee per year.