Stand-alone Health Reimbursement Arrangements (HRAs), or health reimbursement accounts, have been a popular tool used by small businesses for reimbursing employees for individual health insurance and out-of-pocket medical expenses. The Affordable Care Act, however, limited the use of stand-alone HRAs. With stand-alone HRAs off the table for most employers, what are the alternatives?
Small businesses looking to help employees with health insurance and medical costs have four realistic alternatives. Each type of arrangement works differently. Let’s take a look.
HRA Alternative #1 - Qualified Small Employer HRA (QSEHRA)
Small employers who want to reimburse employees tax-free for individual health insurance can adopt a qualified small employer HRA (QSEHRA).
QSEHRAs are employer-funded plans used for tax-free reimbursement of individual health insurance premiums. Created by the 21st Century Cures Act in 2016, QSEHRAs are available exclusively to small businesses with fewer than 50 employees. In 2019, businesses can offer up to $5,150 per single employee and $10,450 per employee with a family through a QSEHRA.
QSEHRAs are 100% employer-funded.
HRA Alternative #2 - Health Insurance Stipend
A second alternative for employers who want to help with employees’ health insurance costs is to adopt a taxable health insurance stipend.
With a health insurance stipend, all similarly situated employees receive a fixed, taxable stipend to purchase individual health insurance, whether or not they actually purchase health insurance.
HRA Alternative #3 - Health Savings Account
Another alternative to consider is a Health Savings Account (HSA). HSAs are individual bank accounts owned by employees that allow for tax-free payment or reimbursement of eligible medical expenses. HSAs may be used for a wide range of medical expenses, but it’s important to note that HSAs may only be used toward health insurance premiums in limited situations.
With an HSA, anyone (employer, employee, or third party) may contribute. An employer usually offers an HSA alongside an HSA-qualified high deductible health plan, but not always. To be eligible for an HSA employees must have an HSA-qualified high-deductible health plan.
HRA Alternative #4 - Flexible Spending Account
The last alternative to a stand-alone HRA is to offer a Health Flexible Spending Account (FSA). FSAs are employer-established plans that allow for tax-free reimbursement of qualified medical expenses, but may not be used on health insurance premiums. Most often, FSAs are employee-funded and there is a $2,500 annual contribution maximum for 2015.
You can also use an HRA and an FSA at the same time.
In the past, small businesses have used Stand-alone HRAs to reimburse employees for healthcare expenses, including individual health insurance. With recent health reform changes, however, small businesses are adopting HRA alternatives including QSEHRAs, health insurance stipends, HSAs, and FSAs.
Do you have a question about HRA alternatives? Or, what HRA alternatives are you seeing small businesses adopt? Leave a comment below.