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Health Reimbursement Arrangement (HRA)
Benefits Plan

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The following chart provides an overview of the ACA’s impact on different types of HRAs, effective for plan years beginning on or after Jan. 1, 2014.

Type of HRA

Status in 2014

Integrated HRA

Permitted if the HRA satisfies one of the integration methods

Stand-alone HRA

Allowed for only 1 employee. Not permitted for 2 or more employees

HRA used to reimburse individual market coverage

Not allowed
Stand-alone, retiree-only HRA
Permitted (exempt from the ACA’s reforms)

Reimbursements for individual health premiums

Only allowed as taxable income

Health Reimbursement Arrangements (HRA) are church-funded arrangements that reimburse employees for certain medical expenses on a tax-free basis, up to a maximum dollar amount for a coverage period. While some churches have paired their HRAs with coverage under a high deductible health plan (HDHP) or a non-HDHP, other churches have offered stand-alone HRAs (that is, HRAs not offered in connection with other group health plan coverage).

The Affordable Care Act (ACA) includes reforms that limit the availability of HRAs beginning in 2014. Under these reforms, most stand-alone HRAs will be prohibited. Also, HRAs will not be able to reimburse employees for their individual insurance policy premiums on a pre-tax basis. Any reimbursements for individual insurance premiums will be taxable income effective 01/01/2014.  However, HRAs that are integrated with other group health coverage will continue to be permissible.

A Health Reimbursement Arrangement (HRA) is an employer-sponsored benefit program approved by the Internal Revenue Service (IRS) that reimburses employees for qualified medical care expenses not already paid for by the employer’s health plan. The HRA is a great way to help stretch your healthcare budget because it allows you to pay for healthcare expenses with money that is not taxed.

Note: A Health Reimbursement Arrangement (HRA) is NOT a Section 125 plan, Cafeteria Plan, or Flexible Spending Plan. Difference include the fact that these plans are more complicated to administer, they are employee funded through salary reduction, and they are characterized as a use-it-or-lose-it type of plan.

A church can use a Health Reimbursement Arrangement (HRA) as a way to lower medical insurance costs but still cover the employees qualified medical expenses tax free. In a year when the cumulative medical costs for employees is relatively low, the savings on insurance costs can be quite significant. On the other hand, in a year of high medical costs, medical reimbursements could be higher than insurance premiums saved. If a church reduces medical insurance coverage in order to lower premiums without adding a health reimbursement arrangment, that church is simply shifting medical expenses from employer to employee. In addition, the employee could then be forced to pay their higher medical expense using after-tax funds. The type of plan helps avoid that added cost to the employee.

The employer (church) must establish a formal written plan. (See plan document link.) Note that this benefit is for employees only and is employer funded. It cannot be funded by any means of salary reduction.

The employer determines the amount available in each employee’s personal account for the coverage period (generally a year). The employer can establish a dollar limit per employee. The employer also determines how much of that amount can be rolled over to future coverage periods.

As eligible expenses are submitted, the employee's personal account is reduced and paid to them on a nontaxable basis.

  • Expenses must be submitted using adequate claim substantiation.
  • The expenses claimed cannot be reimbursed by any other plan.
  • Only qualified expenses may be reimbursed (IRC Section 213)
  • Claims must be only for those expenses incurred during the coverage period.
  • Reimbursement for payments of medical insurance premiums may be included.

Unused funds at the end of the year are carried over to the next year. At the beginning of the next coverage period, additional funds are added. This leaves funds from a low medical cost period available for use in a higher cost period. With no “use-it-or-lose-it” requirements, employees have an incentive to be responsible managers of the balances.

The plan must not discriminate in favor of highly compensated employees with respect to eligibility to
participate or benefits provided under the plan.

 

 

Clergy should not view this information as a substitute for professional advice. This information is subject to change, due to administrative rulings or interpretations and or technical corrections by the IRS. If legal advice or other expert assistance is required, the services of a competent clergy tax professional person should be sought.