What is a retirement health reimbursement arrangement

A Retiree Reimbursement Arrangement (RRA) is a way for employers to help their retirees offset healthcare costs in retirement with tax free dollars. This can be a more predictable and cost-effective option for employers compared to offering defined benefit retiree health plans.

How it Works

The RRA is a cost-effective alternative to group retiree medical plans. Retirees most commonly use RRAs for reimbursement of Medicare premiums, but they can use their RRA to pay for expenses under Section 213(d) of the Internal Revenue Code, if the employer allows for it. All employer contributions to RRAs that follow IRS rules are 100% tax deductible to the employer and tax-free to the retiree.

Employer set-up

The employer sets aside funds for the RRA and determines how much employees can use each year in retirement until it’s exhausted.

Rollover at retirement

If the employer also offers an HRA, and at retirement employees with an HRA have money remaining, the employer may let employees roll over that amount into their RRA.

Retiree uses benefit

Retired employees can use their RRA to pay Medicare premiums and other medical expenses. If the annual amount isn’t used, the employer may let retirees roll over the balance.

If you’re new to offering an HRA through an administration software platform, we can help. At PeopleKeep, we’re experts on HRA administration and help thousands of employers reimburse their employees every day.

Step 1: Design your benefit

First, employers design their HRA benefit so it’s uniquely suited to the needs of their employees. When setting up your HRA, you’ll decide how much tax-free money you want to offer to employees each month, which expenses you’d like to be eligible for reimbursement, and, depending on the type of HRA you’re offering, potentially decide if you’d like to offer different benefits to employees in different groups.

Step 2: Employees make healthcare purchases

Once your benefit is set up, employees are ready to spend their allowance. Employees offered a QSEHRA or ICHRA will purchase the qualifying medical expenses and healthcare services they want with their own money.

Employees offered a group coverage HRA—also known as an integrated HRA—can use their allowances to help cover expenses subject to their deductible. Eligible expenses can include everything listed under IRS Publication 502, although you can limit some of these items according to your preference.

For example, if you want to offer a premium-only QSEHRA that only reimburses employees for their individual health insurance premiums, not out-of-pocket costs, you can do so. Keep in mind that if you’re offering an HRA that’s integrated with your group health insurance plan, then employees will only be able to use their allowance for out-of-pocket expenses, not insurance premiums.

Step 3: Employees submit proof of incurred expenses

Next, after employees have made their purchases, they’ll submit documentation showing proof of the incurred expenses they’re submitting for reimbursement.

This documentation must include:

• The name of the item or service
• The cost of the item or service
• The name of the vendor
• The date of purchase

Invoices, receipts, or an explanation of benefits from an insurer or healthcare provider typically satisfies this requirement. Depending on the item that’s being requested for reimbursement, a doctor’s note or prescription may also be necessary. Keep in mind that this information is subject to HIPAA’s privacy rules and must be handled carefully if you are self-administering an HRA.

Step 4: Review and reimburse expenses

Finally, employers will review the expense and either approve or reject the request. If you’re offering an HRA with PeopleKeep, our experts will review your employees’ submissions for you so you can be sure it qualifies. If it’s a qualified expense, you will reimburse your employee up to their accrued allowance.

Typically, employers choose to reimburse employees through payroll by adding a non-taxable line item to employees’ paychecks, although you can also pay out HRA funds through a separate check, cash, or a bank transfer.

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