Does an HRA roll over?

Health reimbursement arrangements (HRAs) are flexible and personalized health benefits that employers offer their employees to cover the cost of health insurance premiums and out-of-pocket medical expenses. HRAs are popular because they give employees more control over their healthcare decisions and help employers save money compared to group coverage. However, understanding how they work before implementing one at your company is vital.

A common question employers have about HRAs is whether unused benefit funds can roll over monthly or annually. In this article, we’ll explain how HRAs work and whether allowance funds can roll over.

In this blog post, you’ll learn:

• How employers can use an HRA as a formal health benefit to reimburse employees for qualified medical expenses and individual health insurance coverage.
• How HRA funds can roll over depends on the type of HRA and benefit design.
• How employees can spend unused HRA money on eligible expenses before the plan year ends to maximize their benefit.

What is an HRA?

An HRA is an IRS-approved, tax-advantaged health benefit that allows employers to reimburse employees for qualified out-of-pocket medical expenses and individual health insurance premiums. IRS Publication 502 and the CARES Act outline the complete list of eligible HRA expenses¹.

Only employers can fund HRAs. This means employees can’t contribute any of their own money toward the benefit. You offer your employees tax-free money to spend on healthcare costs. Then, you reimburse them for the costs they incur after approving the expense, up to an allowance amount that you define.

A significant perk of HRAs is their tax benefits. Your contributions are tax-deductible and payroll tax-free. Additionally, employees don’t have to pay income taxes on HRA reimbursements for eligible items as long as they meet the benefit eligibility requirements. These include having a health plan with minimum essential coverage (MEC).

The three types of HRAs that PeopleKeep offers are:

• The qualified small employer HRA (QSEHRA): This HRA is for small employers with fewer than 50 full-time equivalent employees (FTEs) that don't offer a group plan. All W-2 full-time employees are automatically eligible for a QSEHRA but must have a qualified health plan with MEC to participate. Allowances provided through a QSEHRA can’t exceed IRS-defined annual contribution limits. Employees can use their HRA funds for individual health insurance premiums and out-of-pocket expenses.
• The individual coverage HRA (ICHRA): The ICHRA is for business owners of all sizes. In order to participate in an ICHRA, employees must have a qualifying form of individual health insurance. Unlike the QSEHRA, the ICHRA has no maximum contribution limits, and employers can set different allowance amounts for different classes of employees. An ICHRA can reimburse employees for individual health insurance premiums and out-of-pocket expenses.
• The group coverage HRA (GCHRA): Also known as an integrated HRA, a GCRHA is available to organizations of all sizes looking to supplement their group health plans. Only employees enrolled in their employer's group health coverage can participate in this HRA. Like ICHRAs, it has no annual limits and has employee class customization options. A GCHRA can’t reimburse employees for premiums.

Other HRA types include the excepted benefit HRA (EBHRA), the dental/vision HRA, and the retiree HRA.

HRAs are flexible, so they work for employers of all sizes, locations, and needs. They're budget-friendly and offer greater customization than other traditional health benefits. They’re also an excellent way to attract and retain talented workers looking for a robust compensation package from their employers.

How does an HRA work?

HRAs are flexible in design. Once you set up your benefit to your liking, draft your HRA plan documents, and communicate it to your eligible employees, you’re all set to start reimbursing your employees for their medical expenses. But let’s dive a little deeper into how they work.

Generally, HRAs follow the same five steps:

1. You determine the monthly allowance you want to provide your employees for medical care. Depending on the type of HRA benefit you’re offering, you can vary allowances by age, family status, or job-based employee class. You can also choose what healthcare expenses are eligible for reimbursement, such as premiums only.
2. Employees purchase their preferred medical services and items. Suppose you’re offering a QSEHRA or ICHRA. In that case, they can enroll in an individual health plan with MEC on a public or private exchange during the open enrollment period (or during a special enrollment period if you’re offering the benefit mid-year).
3. Employees request reimbursement by submitting proof of purchase after incurring an eligible medical expense. Proof of purchase is typically documentation like a receipt, invoice, or Explanation of Benefits.
4. You or your organization’s benefits administrator reviews the documentation to ensure it meets the proper criteria for reimbursement. If it does, you can approve the expense and schedule the payment.
5. After expense approval, you reimburse your employees tax-free up to their allowance amount. You can add the reimbursement to your employees’ paychecks or send the payment separately. Once an employee reaches their monthly allowance limit, they can’t go over it.

If you’re worried about setting up and managing your HRA independently, HRA administration software can help you with the heavy lifting. Using HRA administration software, you can avoid time-consuming tasks, potential penalties, compliance complications, and privacy violations.

Do HRA funds roll over?

If you offer a monthly allowance, unused HRA funds automatically roll over from month to month. However, the type of HRA and how you design the benefit determines whether or not yearly rollovers are allowed and how much money can roll over annually.

For example, unused QSEHRA and EBHRA allowances can roll over yearly. But to comply with annual contribution limits, you can’t roll over an amount from the previous year that would bring the following year’s total allowance amount above the maximum limit. Therefore, an annual rollover only benefits organizations that offer a smaller allowance than the maximum.

ICHRAs and integrated HRAs also allow you to roll over unused funds annually. Although these HRAs have no maximum contribution limits, you can still set a cap on the allowance amount that can roll over from year to year.

You can design and self-administer your HRA or seek the assistance of a third-party administrator. However, if you use an HRA administrator to help you manage your benefit, rollover options may depend on your chosen software. For example, you can only allow monthly rollovers if you have an HRA powered by PeopleKeep.

Many business owners select monthly rollovers instead of rolling over funds annually. However, choosing one option instead of the other depends on your employees’ needs and your benefits administration process.

What happens to unused HRA funds if rollovers aren’t allowed?

If you don’t design your HRA to allow annual rollovers, your employees must use their full allowance by the plan year's end. If they don’t, unused funds will expire at the end of the year. Unlike health savings accounts (HSAs), unused HRA money stays with the employer if an employee doesn’t use their allowance, leaves their job, is laid off, or retires.

Additionally, employees can't “cash out” any remaining HRA money at the end of the year or before they leave your company. This is because HRAs aren’t pre-funded benefits, so they have no cash value. Employees won’t receive any money until they submit an eligible expense for approval.

However, you can set up a 90-day grace period for employees to submit reimbursement requests for any medical expenses they had while employed. Similarly, you can allow a 90-day runout period for employees to turn in receipts for expenses incurred during the previous plan year that they haven’t submitted yet. For example, you can design your HRA to allow employees to submit a healthcare expense they had in 2024 until March 30, 2025.

If you don’t allow annual rollovers and your employees have extra allowance money, they should spend it before the plan year ends to fully take advantage of their HRA. Luckily, they can buy a wide range of eligible healthcare items to use all their HRA funds before the year ends.

Read our blog to get end-of-the-year tips to help your employees use their HRA money before it expires.

Conclusion

Gone are the days of traditional group health insurance. Whether you roll over unused funds monthly or annually, offering an HRA can provide your employees with a powerful tool to offset high insurance premiums and other out-of-pocket medical costs. Better yet, you can have better control over your budget, leaving you more financially secure to handle whatever other business expenses come your way.

If you're ready to offer a QSEHRA, ICHRA, or GCHRA at your organization, PeopleKeep can help! Our HRA administration software makes it easy for employers of all sizes to design and manage their HRA in just a few minutes each month. Contact our HRA specialists to learn how we can set you up with the right benefit for your company.

1. https://www.irs.gov/pub/irs-pdf/p502.pdf