Offering traditional group health benefits has grown increasingly difficult for small organizations. It can often be too costly, complex, or rigid in structure.
For those reasons, many employers feel a health reimbursement arrangement (HRA) is the better option when it comes to stretching healthcare dollars. It gives business owners the flexibility to offer their employees tax-free dollars they can spend on their qualified health expenses or their own health insurance.
In this article, we'll go over the basic structure of an HRA, three of the most popular types of HRAs, and how you can manage your health benefit.
What is an HRA?
An HRA isn't health insurance. An HRA is an employer-funded, IRS-approved, and tax-free health benefit used to reimburse employees for medical, dental, or vision expenses listed in IRS Publication 502. Depending on the type of HRA offered, this often includes health insurance premiums, pharmacy expenses, over-the-counter medicine, and other out-of-pocket medical expenses.
What is the basic structure of an HRA?
Every type of HRA follows a simple, four-step process. First, employers offer their employees a monthly allowance dedicated to health spending. Employees pay out-of-pocket for their own medical coverage costs, including the care they need. Employees then submit proof of their qualified medical expenses for tax-free reimbursement. Once approved, the employer reimburses employees up to their set allowance amount.
Let's look at the steps in more detail in the sections below.
The employer sets an allowance amount
The organization offering the HRA chooses a monthly benefit allowance of tax-free money to offer each employee. Depending on the type of HRA, the organization may be able to offer different allowance amounts to different employees based on bona fide job criteria. Employers don't need to pre-fund these allowances.
This gives employers a cost-effective way to take care of their employees. The employer can design the plan to meet their organization’s unique needs and budget. Whether they offer $500 or $1500 each month, their employees can put that money to good use.
Plus, employers can decide which expenses they want to reimburse. IRS Publication 502 offers a complete list of eligible expenses, but employers can limit the list they offer to their employees.
Employees use their allowance on the medical expenses that matter most to them
Depending on the HRA being offered, its flexibility allows employees to pay for qualifying care, treatment, supplies, and insurance premiums that work best for them. As mentioned above, the employer will typically outline what qualified expenses are included in their benefit.
No two employees are alike. They have different wants, needs, lifestyles, and health concerns. It’s easier to support diversity and inclusivity with an HRA compared to a one-size-fits-all traditional group health insurance plan. By offering this well-rounded health benefit, each employee has the freedom to choose the unique medical services and best local healthcare providers for their needs.
For employers, HRAs are a great way to eliminate many of the administrative headaches associated with group health insurance while still offering a comprehensive health benefit. This also makes it simpler for multi-state employers and remote companies to easily offer a benefit that works for everyone.
Employees submit proof of purchase
After the employee incurs an eligible expense, they submit documented proof of the expense to their organization. This documentation must include a description of the product or service, the cost of the expense, and the date the employee incurred the expense. Invoices or receipts typically satisfy this requirement, as does an explanation of benefits (EOB) from the employee's insurer. A doctor's note may also be required for certain expenses.
The employer reimburses employees
The organization reviews the employee's submission and, if it qualifies, reimburses the employee from the monthly allowance for that benefit. If it doesn't qualify, the organization must follow a declined claims and appeals process outlined in its HRA plan documents. Typically, small businesses include the reimbursement in the employee's next regular paycheck without including it as gross income and without payroll taxes. As long as the employee has minimum essential coverage (MEC), they will not need to report this money as income at the end of the year.
HRA vs. health savings account (HSA)
An HRA is often confused with an HSA, and that could be because they sound so similar. Both HRAs and HSAs can help cover healthcare costs by using tax-advantaged money to fund employee medical expenses. But these two health benefits differ in many ways.
Here are a few primary differences between an HSA and HRA:
- An HSA is owned by the employee rather than the employer. This means if an employee leaves your organization, they can take their HSA funds with them. HRA funds stay with the employer, enabling further cost-savings over traditional group health insurance
- Contributions to HSAs can come from both the employer and the employee. However, only an employer can contribute to an HRA.
- Employees can claim a tax deduction for contributions they make to their HSA. With an HRA, reimbursable expenses won't be counted as part of the employee's taxable income.
- With an HSA, there's an annual contribution limit. For the majority of HRAs, there are no annual maximum contribution limits.
- Often, employers use HSA debit cards that employees can use to pay for medical services on the spot rather than be reimbursed for them later. HRA funds are generally only available for reimbursement with an approved receipt once the service has already been paid for.
- To be eligible for an HSA, an employee must be covered by an HSA-qualified high deductible health plan (HDHP). Depending on the type of HRA, it can be paired with any traditional group health plan or any individual health plan.
- If you have unused money left in your HSA at the end of the year, it will roll over to the following year. But if you’d like to roll over unused funds in an HRA, the option and amount vary by plan type.
What are the different types of HRAs?
There are several types of HRAs available, and each one offers tax benefits. Three of the most popular options are the qualified small employer HRA (QSEHRA), the individual coverage HRA (ICHRA), and the integrated HRA, also known as a group coverage HRA (GCHRA).
When choosing the right HRA for your organization, here's a rough guideline to follow:
- QSEHRA. Use a QSEHRA if you’re an organization with fewer than 50 full-time equivalent employees (FTEs) looking for easy-to-manage, simple-to-deploy health benefits.
- ICHRA. Use an ICHRA if you want the flexibility to offer different allowances to different classes of employees or if you want to ensure your employees purchase individual health insurance policies with their allowances.
- GCHRA. Use a GCHRA if you want to supplement an existing group health insurance plan by reimbursing employees for out-of-pocket medical costs such as deductibles.
Let’s dive into each option to give you a better idea of how they work.
How does a qualified small employer HRA (QSEHRA) work?
In December 2016, Congress made a formal exception on HRAs with the passage of the 21st Century Cures Act1. The law created the QSEHRA, a personalized health benefit for organizations with fewer than 50 FTEs.
With a QSEHRA, employer contributions are capped annually. In 2023, annual employee allowances are limited to $5,850 for self-only employees and $11,800 for employees with a family. Employer-set allowances must be offered on the same terms to all eligible employees, and an organization can't offer different allowance amounts to different employees unless those differences are based on family status. Additionally, QSEHRA participants must coordinate their allowance with any premium tax credits.
A QSEHRA is ideal for small organizations with fewer than 50 FTEs who want a health benefit that is affordable and easy to manage.
How does an individual coverage HRA (ICHRA) work?
On June 20, 2019, the IRS published Health Reimbursement Arrangements and Other Account-Based Group Health Plans2. This formalized then-President Trump’s 2017 executive order to create new HRAs. In addition to expanded coverage for short-term plans, these rules created the ICHRA and the excepted benefit HRA (EBHRA), which employers could begin offering to employees on January 1, 2020.
Unlike QSEHRA, there are no limits on the allowance amount employers can set. In addition, employers can set different allowance amounts according to job classifications, like full-time, part-time, salaried, hourly, or where employees are located.
Employers can also offer an ICHRA alongside a group health insurance plan, as long as the class of employee offered an ICHRA is not also offered group health insurance.
Employees using an ICHRA are required to have individual health insurance coverage. They must purchase a plan through the healthcare.gov3site, their state's individual insurance exchange, or a private exchange. Employees who qualify for premium tax credits and are offered an ICHRA must forgo their tax credits if their employer offers an ICHRA allowance that is considered affordable according to IRS regulations. If the allowance is considered unaffordable, they may keep their premium tax credits and opt out of the ICHRA.
The ICHRA is ideal for organizations of any size that want the flexibility to offer different benefits to different classes of employees who might also want to offer a greater allowance than the QSEHRA allows.
How does a group coverage HRA (GCHRA) work?
The GCHRA enables employers to supplement a group health insurance plan. These HRAs are available to organizations of all sizes and are a way to enhance your benefits.
The organization can choose to offer different allowance amounts to different employees based on bona fide job criteria. Eligibility is limited to employees also participating in the organization's group health insurance policy.
Employees can be reimbursed for any eligible out-of-pocket expenses listed in IRS publication 502, though the employer may choose to limit this list if it wants to. Employees with a GHCRA can’t be reimbursed for insurance premiums of any kind.
Employers also have the option of requiring an explanation of benefits (EOB) from their group carrier in order for out-of-pocket medical expenses to be reimbursed.
A GCHRA is ideal for employers who have an existing group health insurance plan they want to supplement, either to take the bite out of a high-deductible plan or to enhance a feature-rich health benefits package.
Why should you use an HRA administrator to manage your benefit?
While each HRA works slightly differently, all of them are held to many of the same sets of federal requirements, such as HIPAA, ERISA, and IRC. Since these requirements can be challenging to follow, many small business owners choose to implement their HRA benefits through HRA administration software.
PeopleKeep makes it easy to manage your employee benefits with our cloud-based administration platform. We take the hard work out of offering an HRA by performing documentation reviews for all submitted employee expenses, providing customer support, and generating your plan documents to avoid compliance and privacy complications.
With PeopleKeep, small and midsize organizations can ensure they deploy a compliant health benefit that can be managed in minutes per month.
As the cost of traditional health plans grow, HRAs are becoming increasingly popular among small business owners. There are several types of HRAs available, including the QSEHRA, ICHRA, and GCHRA.
Offering an HRA is a cost-effective way employers can help stretch healthcare dollars. By reimbursing eligible expenses, employers make it easier for their employees to afford the medical care they need. Plus, adding an HRA to your benefits package also makes it easier to recruit and retain talented employees.
This post was originally published on February 22, 2018. It was last updated on April 13, 2023.