Employer-sponsored health benefits have a long legacy in the United States dating all the way back to World War II. However, health reimbursement arrangements (HRAs) are a newer kind of health benefit that have evolved significantly in just the past few years. With their cost-controlled and flexible nature, HRAs are growing in popularity, especially for small and medium size businesses.
If you’re new to HRAs, you may be wondering: How did this unique health benefit come to be? In this article, we’ll walk you through the history of HRAs, how they’ve changed over the years, and why they’re a boon to employers and their employees all over the country.
The beginnings of employer-sponsored healthcare
Our story begins in the early years of the 20th century. During this time, most employees worked at large manufacturing plants, where employers often provided onsite medical care in the form of a company doctor. These doctors were funded and managed by the employer.
This developed into today’s system where employers pay for their employees’ medical expenses through self-insured or fully-insured health benefits plans. These came to be known as “defined benefit” healthcare plans in which employees receive a defined benefit, typically unlimited healthcare, at an uncertain cost to the employer.
Demand for a health reimbursement model grows
In the 1960s-1990s, as deductibles and exclusions became more common in both self- and fully-insured health benefits plans, some employers instituted “arrangements” to reimburse employees for qualified medical expenses that weren’t covered by their health benefits plan.
The federal government made these arrangements subject to ERISA (1974) and HIPAA (1996) to ensure that they provided equal benefits to similarly situated employees.
Defined contribution health plans increase in popularity
In the late 1990s, HRAs with annual maximums, called “defined contribution plans,” became more popular.
These plans were especially popular in allowing employers to reimburse employees for non-critical medical expenses (e.g. weight loss programs or prescription eyeglasses) which consumers had a higher propensity to incur than expenses for illness.
Health reimbursement arrangements are formally defined
In general, this notice and ruling (and subsequent guidance) outlines the following:
- HRAs must be funded solely by the employer
- HRAs can only provide benefits for substantiated medical expenses
- HRAs can allow the carryover of unused amounts to later years
- (i.e., the "use-it-or-lose-it” rules of Section 125 Plans don’t apply, although the benefit can be set up to limit annual rollover)
- HRAs can reimburse employees for payment of personal health insurance premiums
- HRAs may be used to reimburse former employees, including retirees, for qualified expenses
To the U.S. Department of Treasury and IRS, HRAs are similar to arrangements employers have today to reimburse employees for incidental travel, meals, or office supply expenses. Employees pay such expenses themselves, submit receipts to their employer, and employers verify the receipts and reimburse employees tax-free.
New legislation restricting health reimbursement arrangements
In 2013, Notice 2013-54 seriously limited businesses’ ability to offer HRAs. The notice was released to ensure that there are no dollar limits on the coverage for a person’s ten essential health benefits, including prescription drugs, hospitalization, preventative and wellness services, and other healthcare needs.
The IRS argued that a health plan that reimburses employees for medical expenses—like an HRA—can’t comply with this regulation because the employer’s contribution would technically be limited, even though the health insurance the employee purchases on the individual market wouldn’t have any annual limits.
This meant that employers could only offer “premium-only HRAs,” where employees are only reimbursed for their insurance premium—not any other out-of-pocket expenses. This solution worked because insurance premiums are not one of the ten essential health benefits that the IRS said can’t have dollar limits placed on them.
Restrictions on health reimbursement arrangements are lifted and a new HRA is born
Thankfully, the limitations of HRAs didn’t last long. In 2016, new legislation called the Small Business Healthcare Relief Act, was passed, widening the previously restricted HRAs caused by the 2013 notice, as well as creating a new HRA—the qualified small employer health reimbursement arrangement (QSEHRA).
With a QSEHRA, small employers with fewer than 50 employees could again offer an HRA integrated with individual health insurance as well as reimburse their employees for all of the out-of-pocket medical expenses outlined in IRS Publication 502.
More new legislation, more new opportunities
In October 2017, President Donald Trump issued an executive order asking the Departments of the Treasury, Labor, and Health and Human Services to look into ways to expand the availability and usability of HRAs even further.
The Departments responded with the proposed regulations issued on October 23, 2018, which were finalized on June 13, 2019. Among other provisions, the regulations created a new HRA called the individual coverage HRA (ICHRA).
Unlike other HRAs, the ICHRA is available to businesses of any size. In addition, it comes with no allowance caps and allows employers to vary eligibility and allowance amounts among different classes of employees.
Other HRAs to supplement group health insurance
As HRAs evolved, so did employers' use of them. For example, while some employers choose to offer an HRA as a stand-alone benefit, others choose to use it as a supplement to their traditional group health insurance plan. This is made possible with unique HRAs like the integrated HRA, or what we call a group coverage HRA (GCHRA).
With a GCHRA, employees can use their HRA allowance to pay for the healthcare expenses that aren’t fully paid for by the group health plan, making for an even more affordable and accessible healthcare experience for employees. For example, funds from a GCHRA can help supplement a group coverage plan by helping employees pay for a high deductible in order to keep their premium costs low.
With the creation of health reimbursement arrangements, employers both big and small are able to offer a quality, IRS-approved health benefit at a cost both employers and employees can afford. With the cost predictability of choosing your employees' allowance amount combined with the freedom your employees have of choosing their own individual health insurance, HRAs are a win-win all around.
With the creation of new HRAs and the rules they come with, it can be tricky knowing which is best for you—that’s why we’ve designed an HRA quiz that does all the thinking for you.
This article was originally published on May 8, 2012. It was last updated September 29, 2021.