Generally speaking, employees and former employees may participate in an HRA. If the HRA is a general-purpose HRA for active employees, the ACA requires that the HRA be integrated with group health coverage. Very generally, “integrated” means that the HRA covers expenses relating to the group coverage (i.e., deductibles, co-insurance, etc.). The participating employees must be enrolled in a group health plan (either directly through the employer or through outside coverage, such as through a spouse’s employer). If the HRA is a limited-purpose (reimburses only dental and/or vision expenses) or a stand-alone retiree-only HRA, it isn’t subject to the ACA (and therefore doesn’t have to be integrated with group coverage). So, an employer could make all former employees eligible for a retiree-only HRA (even if they didn’t have group coverage).
Because HRAs are only for employees or former employees, self-employed individuals are generally not eligible to participate in an HRA. A self-employed individual includes a sole proprietor, partner in a partnership (sometimes also called a “K-1 earner”) and a more-than-2% S corporation shareholder. For LLCs, if the LLC is taxed as a partnership, the owners will generally be considered self-employed. On the other hand, if the LLC is taxed as a corporation, and for C corporation owners, the owner may participate as long as they are otherwise treated as an employee (i.e., receive W2 income).
As for distributions from the HRA, employees and former employees may use HRA funds to pay or reimburse medical expenses of their federal tax dependents. That generally includes a spouse and a child (step/adopted child included). Expenses for children can be reimbursed up until the end of the year in which the child turns age 26, regardless of whether the child is a tax dependent of the employee. A “child” may also include an eligible foster child (one placed by an authorized agency or by judgment or other decree/order of a court). An employee may use HRA funds for a domestic partner’s expenses only if the domestic partner is the federal tax dependent of the employee.
Employers are generally free to determine eligibility and restrict distributions to certain expense types (such as a dental/vision-only HRA) as they see fit. Because an HRA is considered self-insured and therefore subject to the Section 105 nondiscrimination rules, employers shouldn’t favor their more highly compensated individuals (such as a management or executive group) in their HRA eligibility and benefit/reimbursement design. Beyond that, employers should document eligibility and plan design in the related plan documents and communicate them to employees.
Please ask your advisor for a copy of our white paper HRAs and Other Employer Reimbursement Arrangements.