What is a Health Reimbursement Arrangement?

Please Note:  You cannot use a Health Reimbursement Arrangement to cover the monthly share amount when using a Christian Share Ministry (Medical Co-op).

A Health Reimbursement Arrangement (HRA) can be an effective way for churches to provide medical care for their pastors and/or lay employees.  In order for a plan to be a legitimate HRA the following criteria must be followed:

1. HRAs are funded solely by the employer and not through salary reduction.
2. HRAs cannot be part of a cafeteria plan and must be treated as a separate issue.
3. Non-discrimination rules apply and all employees who are full-time (30 hours or more per week) must receive the same benefit.
4. HRAs may only be used to reimburse employees for medical care for themselves, their spouse or their dependents
5. Reimbursements can only be made for substantiated medical care expenses.

The benefits of an HRA?

1. When there are less than 50 full-time (30 hours or more) employees, the church may reimburse the pastors/employees for medical insurance*.  This may be especially helpful if the medical insurance provider will not accept a church check for payment of premiums.  Distributions from the HRA are limited to $6,150 for an individual and $12,450 for family.  The HRA can reimburse medical insurance premiums and other out-of-pocket medical expenses.
   NOTE:  When you have only one full-time employee you qualify for a stand-alone HRA.  A stand-alone HRA has no limits.
2. Any “unused” funds can be carried forward to increase the reimbursement amount available in the following year.  The “use it or lose it” rule would not apply.
3. Distributions of HRA funds to reimburse or pay an employee’s medical expenses are not taxable for federal, state or self-employment.

*The Marketplace (state exchanges) is where the uninsured are able to go to obtain health insurance. These are the government websites you have heard so much about. Using an exchange a low-income individual or family may qualify for a tax credit to help pay for their premium or they can choose to take a credit on the tax return instead.  If the church or employer pays this premium through a HRA for an employee with a government subsidy, the marketplace will need to be notified as this will affect the subsidy and the HRA will most likely end up not being helpful.

Here is a sample Health Reimbursement Arrangement which your church can adopt

“Name of your Organization”

Health Reimbursement Arrangement

In an effort to reduce the potential for added out-of-pocket health expenses to our full-time employees the “Name of your Organization” has seen fit to establish a Health Reimbursement Arrangement. The Internal Revenue Service requires that certain conditions exist in order for a Health Reimbursement Arrangement to be considered non-taxable.  The Health Reimbursement Arrangement of the “Name of your Organization” will be subject to the following conditions:

1.      The Health Reimbursement Arrangement will be provided to all full-time (at least 30 hours per week) employees of the “Name of your Organization”.

2.      The Health Reimbursement Arrangement will provide a yearly benefit.

• Each employee will have “Amount to be made available” per “week/month/year” available.  For a total of “Amount to be made available” per year
• The HRA will begin the “first/second/third/etc” year of employment on January 1st and ending on the last day of employment at which time any unused funds will be absorbed back into the general fund.
• Amounts remaining in the HRA on December 31st of each year will be carried forward and added to the HRA for the following year.  (You can eliminate the option to carryforward remaining amounts or use the following option:  On December 31st of each year any remaining amounts up to $_____  will be carried forward to the HRA for the following year.)

3.      You will be reimbursed for health insurance premiums and deductible out-of-pocket medical expenses.

• Only expenses that are not covered by a medical plan are eligible for reimbursement.
• You may be reimbursed for Medical and Dental payments that would be includible on Schedule A of your Federal return.  (See attached list of what is and what is not deductible).
• You CANNOT be reimbursed without turning in receipts.  If you fail to obtain a receipt from your doctor, dentist or pharmacists, you will be unable to be reimbursed.

4.      The Health Reimbursement Arrangement will be available for the full-time employee who retires directly from our employment.

• If you retire from our service and do not pursue new employment, the amount remaining in your HRA at the time of retirement will be available to you for reimbursement until the funds are used up.

Examples of Medical and Dental Payments You May Be Reimbursed For

• Insurance premiums for medical and dental care, including premiums for qualified long-term care contracts as defined in Pub. 502.
  Note:  Pub. 502 specially prohibits deducting insurance paid with pre-tax dollars.  This means you cannot be reimbursed for premiums paid through your spouse’s salary reduction.
• Prescription medicines or insulin.
• Nonprescription medicines (including pain relievers, antacids, cold medicines and allergy drugs) obtained with a prescription.
• Medical doctors, osteopathic doctors, dentists, eye doctors, podiatrists, chiropractors, psychiatrists, psychologists, physical therapists, occupational therapists, acupuncturists, and psychoanalysts (medical care only).
• Medical examinations, X-ray and laboratory services, insulin treatment, and whirlpool baths your doctor ordered.
• Nursing help (including your share of the employment taxes paid). If you paid someone to do both nursing and housework, you may be reimbursed for only the cost of the nursing help.
• Hospital care (including meals and lodging), clinic costs, and lab fees.
• Qualified long-term care services (see Pub. 502).
• The supplemental part of Medicare insurance (Medicare B).
• The premiums you pay for Medicare Part D insurance.
• A program to stop smoking and for prescription medicines to alleviate nicotine withdrawal.
• Medical treatment at a center for drug or alcohol addiction.
• Medical aids such as eyeglasses, contact lenses, hearing aids, braces, crutches, wheelchairs, and guide dogs, including the cost of maintaining them.
• Surgery to improve vision including radial keratotomy or other laser eye surgery.
• Lodging expenses (but not meals) while away from home to receive medical care in a hospital or a medical care facility related to a hospital. No more than $50 a night for each eligible person.
• Ambulance service and other travel costs to get medical care. If you used your own car, you may claim what you spent for gas and oil to go to and from the place you received the care; or you may claim 16 cents a mile for 2021. Add parking and tolls to the amount you claim under either method.
• The amount you can deduct for qualified long-term care insurance contracts (as defined in Pub. 502) depends on the age, at the end of the calendar year, or the person for whom the premiums were paid.
• See chart below:
  

  Age before the end of the tax year	Maximum deduction 2023	Maximum deduction 2024
  40 or younger	480	470
  More than 40 but not more than 60	890	880
  More than 50 but not more than 60	1790	1760
  More than 60 but not more than 70	4770	4710
  More than 70	5960	5880

Examples of Medical and Dental Payments You May Not Deduct

• The cost of diet food.
• Insurance premiums for medical and dental care (when you have more than 50 full-time employees) also, premiums for long-term care contracts as defined in Pub. 502.
• Cosmetic surgery unless it was necessary to improve a deformity related to a congenital abnormality, an injury from an accident or trauma, or a disfiguring disease.
• Life insurance or income protection policies.
• The Medicare tax on your wages and tips or the Medicare tax paid as part of the self-employment tax or household employment taxes.
• Nursing care for a healthy baby.
• Illegal operations or drugs.
• Nonprescription drugs, vitamins and supplements.
• Travel your doctor told you to take for rest or a change.
• Funeral, burial, or cremation costs.

Whose Medical and Dental Expenses Can You Include?

You may include medical and dental bills you paid for:

• Yourself and your spouse.
• All dependents you claim on your return.
• Your child whom you do not claim as a dependent because of the rules explained in Pub. 501 for children of divorced or separated parents.
• Any person you could have claimed as a dependent on your return if that person had not received $4,400 or more of gross income or had not filed a joint return.

Example. You provided over half of your mother’s support but may not claim her as a dependent because she received wages of $4,400 during the tax year. You may include on line 1 any medical and dental expenses you paid during the tax year for your mother.