Are Health Reimbursement Accounts Taxable and What You Need to Know

Health reimbursement accounts (HRAs) can be a bit confusing, but understanding how they work can make a big difference in your finances.

The IRS considers HRAs to be taxable, but with some caveats. The contributions made by the employer are not taxable to the employee, but the reimbursements are considered taxable income.

The tax implications of HRAs can be complex, but one thing is clear: if you use the money in your HRA for non-medical expenses, you'll have to pay taxes on it.

Health Reimbursement Arrangements are a type of employer-funded health benefit that reimburses employees for medical expenses and, in some cases, health insurance premiums. This process involves the employer setting up an HRA plan, deciding on the reimbursement limits, and choosing between different HRA types.

Employers can limit reimbursements to eligible premium expenses only, typically referring to individual health insurance premiums, but could also include eligible dental premiums, vision premiums, etc. as long as the employee has Minimum Essential Coverage (MEC) for QSEHRA or a qualified health plan for ICHRA.

Most employers allow medical expenses to be reimbursed too, but can exclude categories of expenses as long as the exclusion is applied fairly to everyone. This means that employers have some flexibility in deciding what expenses are eligible for reimbursement.

Here are the steps involved in a Health Reimbursement Arrangement:

Health Reimbursement Arrangements are tax-advantaged if you closely follow IRS rules. Employers who don’t comply with these stringent regulations may cause the company and its employees to pay tax on their HRAs.

Assets used to pay for qualified medical expenses through an HRA are not taxed, thanks to IRC Section 105. This section provides tax-exclusion for amounts received as reimbursement of medical care expenses.

If an HRA fails to meet the requirements, all distributions made, including those for qualified medical expenses, will be taxable to the participants. This is a major consequence of non-compliance with IRS rules.

Employers who set up HRAs correctly can reimburse medical expenses, such as health insurance premiums, with money free of payroll taxes for both the employer and employee. An HRA is also free of income tax for the employee.

Healthcare stipends, on the other hand, are taxable, with employers paying payroll tax on them and employees paying income tax on the value they receive. This can add a significant financial burden for employees.

Assets used to pay for qualified medical expenses are not taxed, thanks to IRC Section 105, which provides tax-exemption for amounts received as reimbursement of medical care expenses.

Employers can reimburse medical expenses, such as health insurance premiums, with money free of payroll taxes for both the employer and employee, as long as the HRA complies with federal rules.

Health insurance reimbursement through a health reimbursement arrangement or reimbursing employees for health insurance is not taxable, and HRA contributions aren't considered income.

To get the tax benefits of this health plan, an HRA must follow IRS procedures, including strict rules about setting up formal plan documents.

HRA reimbursements are generally not taxable, but an exception is when employers reimburse non-medical expenses, which the IRS considers to be deferred compensation and, therefore, taxable to the employee.

Here are the tax implications for HRAs:

IRC Section 106 provides tax-exclusion for contributions an employer makes to an HRA, meaning employees are not taxed on employer contributions.

Offering a taxable health stipend can be a great financial support system for employees with various medical bills for chronic conditions or simply want more coverage to pay for doctor visits or over-the-counter medicine.

Employees who participate in premium tax credits can take advantage of these benefits without reducing their premium tax credit by their allowance amount.

This type of stipend can help employees with additional out-of-pocket expenses, especially if they already have a group health insurance plan or an HRA.

However, employees will have to pay taxes on these extra allowances.

To understand if health reimbursement accounts (HRAs) are taxable, it's essential to grasp the requirements and qualification criteria for HRAs. An HRA must be 100% employer-funded, with employees unable to contribute.

Formal plan documents must define qualified medical expenses for HRAs to meet IRS requirements. This is crucial to avoid any tax implications.

Certain types of HRAs have maximum annual employer contribution limits, while others don't. For example, the qualified small employer HRA (QSEHRA) and the excepted benefit HRA (EBHRA) have limits, but the individual coverage HRA (ICHRA) and the group coverage HRA (GCHRA) do not.

To qualify as a HRA, it must be funded solely through employer contributions or mandatory employee contributions. Employees cannot voluntarily contribute on either a pre-tax or after-tax basis.

Each medical expense submitted for reimbursement must be "adjudicated" as a "qualified" medical expense by the Plan Administrator (substantiated with documented proof) prior to reimbursement from the HRA.

As you explore the world of Health Reimbursement Accounts (HRAs), you'll notice that plan designs can vary significantly from one employer to another. This is because sponsoring employers have a wide range of options when it comes to designing their HRA plans.

Some HRA plans only reimburse expenses incurred against the health plan deductible, while others allow co-pays and co-insurance. This means that employees may be able to get reimbursed for a wider range of expenses, depending on the plan design.

The reimbursement procedure can also differ between plans. Some HRA plans require an insurance carrier explanation of benefits (EOB) to gain reimbursement, while others may accept a medical provider's itemized billing.

Expense categories are another area where plan designs can vary. Some employers may only allow reimbursement for medical expenses, while others may include dental and vision expenses as well.

Plan funding is also an important aspect of HRA plan design. Some plans make all available reimbursement funds available at the beginning of the plan year, while others may incrementally fund the plan (e.g. semi-annually, quarterly, monthly, or by claim).

Unused funds in an HRA plan can also be treated differently. While most HRAs do not roll over unused funds to the following plan year, some plans do allow rollover.