A Health Reimbursement Arrangement (HRA) is not health insurance. Rather, it is an employer-sponsored healthcare and premium reimbursement program. And yet, an HRA benefit is often compared to (or mistaken as) health insurance. Why? Because many businesses offer a stand-alone HRA benefit as an alternative to offering traditional health insurance.
But as the logic goes, if an HRA looks like an insurance plan, and acts like an insurance plan... isn't it an insurance plan? No. And here's why.
HRAs Are Medical Reimbursement Plans, Not Health Insurance
HRAs are an IRS-approved way for employers to reimburse employees for individual health insurance policies and eligible medical expenses. In other words, HRAs are a vehicle for tax-free healthcare and premium reimbursement.
An HRA is a Section 105 ERISA self-funded health plan. With a stand-alone HRA, the business steps away from selecting a specific insurance plan for all employees. Instead, the business allows employees to purchase a health insurance policy that fits their needs, and reimburses employees for eligible medical expenses tax-free up to the amount of their HRA allowance. This type of HRA benefit is also referred to as a defined contribution health benefit model.
Using an HRA is one of the only ways a business can pay for employees' individual health insurance plans in a compliant way. That's because HIPAA and ERISA restricts an employer's involvement in the sale or administration of employees' individual health insurance policies. Using a formal HRA benefit removes the employer from having any involvement in the policies employees are purchasing. An HRA keeps the employer compliant with HIPAA, ERISA, and the IRS.
For more on details on HRA requirements and compliance see: HRA plan requirements.
HRAs - An Alternative to Traditional Health Insurance
Many small and medium businesses cannot offer health insurance coverage due to rising costs and minimum contribution and participation requirements. Because of this, and because of new opportunities with health reform in 2014, many businesses see HRA benefits as a viable alternative to traditional group health insurance. This is because:
In 2014, individual policies become guaranteed issue, and eliminate the non-economic (i.e. moral) factors from an employer’s decision-making process.
Most employees will pay less for health insurance on the individual market due to federal subsidies available through the state health insurance Marketplaces.
For small businesses with less than 50 FTE employees, there is no employer mandate and no penalties for not offering group health insurance. And for many businesses with 50+ FTE employees, the total cost of paying the employer penalty (now delayed until 2015) plus providing an HRA defined contribution health benefit will be less expensive than group health insurance. Additionally, the only way for employers to give employees access to the individual premium tax subsidies is by not offering group health insurance.