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How Does an HRA Work?

Written by: Josh Miner
October 9, 2020 at 9:58 AM

Offering traditional group health benefits has grown increasingly difficult for small organizations. Simply put, it's too expensive, too complex, and too one-size-fits-all.

But small organizations recognize that dropping benefits altogether isn't an option either. Health reimbursement arrangements (HRAs) give them the flexibility they need to offer employees tax-free money to spend on the health care products they find most valuable. This approach helps organizations control costs while reducing administrative requirements and giving employees greater choice.

Download our ebook: The small business guide to health benefits

With an HRA, an organization offers employees a monthly allowance, and employees pay for the medical coverage and expenses that best fits their needs. The employer then reimburses the employee up to their allowance.

The HRA has changed through the years, though. There are now several types of HRAs available, and many employers want to know exactly how they work and how they compare.

In this post, we'll go over the basic structure of an HRA and explain how it works. We'll also examine four of the most prominent types of HRAs, exploring how they work and how they differ from each other.

Finally, we'll look at how an HRA works with HRA administration software—a new administration choice among small employers. Note that this post does not address the stand-alone HRA, which is no longer compliant, or the one-person stand-alone HRA, which PeopleKeep does not support.

How does an HRA work?

All HRAs follow a simple, four-step process: The organization chooses an allowance, employees buy what they want, they submit proof of incurred expenses, and the organization approves and pays the reimbursement.

Learn more about what an HRA is

Let's look at the steps in more detail.

  1. 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 prefund these allowances.
  2. Employees buy what fits their personal needs. They receive no input from the organization during this process, though the organization usually has some say in which expenses are eligible for the benefit. Broadly, employees can receive reimbursement for any item listed in IRS publication 502, which may include personal insurance premiums.
  3. Employees submit proof of purchase. After the employee incurs an eligible expense, they submit 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, but so does an explanation of benefits from the employee’s insurer. Sometimes a doctor’s note may also be required.
  4. 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 their 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.

Take our quiz to learn which HRA fits your organization’s needs best

How a qualified small employer HRA (QSEHRA) works

In December 2016, Congress made a formal exception on HRAs with the passage of the 21st Century Cures Act.

The law created the qualified small employer health reimbursement arrangement (QSEHRA), a personalized health benefit for organizations with fewer than 50 employees.

We’ll go over the four-step process for HRAs, noting key features of a QSEHRA:

  1. The employer sets an allowance amount. The organization chooses a monthly benefit allowance of tax-free money to offer each employee. In 2020, annual employee allowances are limited to $5,250 for self-only employees and $10,600 for employees with a family. These allowances must be offered to all eligible employees, and an organization can’t offer different allowance amounts to different employees unless those differences are based on family status. Learn more about whether an employer has to offer health insurance to all employees. Additionally, QSEHRA participants must coordinate their allowance with any premium tax credits.
  2. Employees buy what fits their personal needs. They can be reimbursed for any item listed in IRS publication 502, though the organization may choose to limit this list.
  3. Employees submit proof of purchase. After the employee incurs an eligible expense, they submit 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.
  4. 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 their HRA plan documents.

A QSEHRA is ideal for organizations with fewer than 50 employees who want a health benefit that is easy to deploy and manage, and who don’t have a need or a budget for more than the maximum contribution limit.

Download our comprehensive guide to the QSEHRA

How an individual coverage HRA (ICHRA) works

On June 20, 2019, the IRS published Health Reimbursement Arrangements and Other Account-Based Group Health Plans. A key objective of this document was to provide more health insurance choices to employers and individuals. In addition to expanded coverage for short-term plans, these rules created the individual coverage HRA (ICHRA), which employers could begin offering to employees on January 1, 2020.

We’ll go over the four-step process again, noting where an ICHRA differs from a QSEHRA.

  1. The employer sets an allowance amount. 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.
  2. Employees buy what fits their personal needs. Employees using an ICHRA are required to have MEC. If they already do (for example, they have an existing individual plan or are covered under a spouse’s group plan), they can be reimbursed for all expenses, including premium costs, IRS publication 502. If they do not, they must purchase a plan through the healthcare.gov site or their state’s individual insurance exchange. Employees offered an ICHRA lose eligibility for premium tax credits if their employer offers an allowance that is considered affordable according to IRS regulations.
  3. Employees submit proof of purchase. After the employee incurs an eligible expense, they submit 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.
  4. 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.

The ICHRA is ideal for organizations of any size who 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.

Download the complete guide to offering an ICHRA

How a group coverage HRA works

The group coverage HRA (GCHRA) enables employers to supplement a group health insurance plan. These HRAs are available to organizations of all sizes and are often offered alongside a high-deductible group policy.

Group coverage HRAs follow the basic HRA structure. Once again, we’ll review the four-step process while noting specific requirements associated with a GCHRA..

  1. The employer sets an allowance amount. The organization chooses a monthly benefit allowance of tax-free money to offer each employee. 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.
  2. Employees buy what fits their personal needs. Employees can be reimbursed for any item listed in IRS publication 502, though the employer may choose to limit this list if it wants to. Note that employees in a GHCRA are not reimbursed for insurance premiums, however, they will still receive the tax advantages on money spent toward their group health insurance plan.
  3. Employees submit proof of purchase. After the employee incurs an eligible expense, they submit 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.
  4. The employer reimburses employees. The organization reviews the employee’s submission and, if it qualifies, reimburses the employee from the monthly allowance for that expense. If it doesn’t qualify, the organization must follow a declined claims and appeals process outlined in their HRA plan documents.

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 benefit package.

Download our guide to offering a GCHRA

QSEHRA vs. ICHRA vs. GCHRA

Which HRA is right for you? It really depends on your needs. Following are some rough guidelines:

  • QSEHRA. Use a QSEHRA if you are looking for simple to deploy and manage, one-size-fits-all health benefit.
  • ICHRA. Use an ICHRA if you want the flexibility to offer different health benefits to different classes of employees and if you want to make sure your employees have minimum essential coverage.
  • GCHRA. Use a GCHRA if you want to supplement an existing group health insurance plan by reimbursing employees for out-of-pocket medical expenses.

For a detailed comparison of HRAs: Download this full comparison chart

Simplify HRA administration with software and services

Each HRA works slightly differently, but all follow the same structure and are held to many of the same base set of federal requirements (HIPAA, ERISA, and IRC).

Because these requirements can be complex, many small employers choose to implement their HRA benefit through a provider of HRA administration software. With products like PeopleKeep, small organizations can ensure they deploy a compliant health benefit that can be managed in minutes per month.

Watch a demo of our HRA administration software

Conclusion

With traditional group health benefits costs continuing to rise, the HRA will become increasingly popular. In fact, the Department of Health and Human Services (HHS) estimates that HRAs will be used by 800,000 employers and more than 11 million employees and family members in the U.S.

HRAs are a powerful tool for organizations looking to hire and keep talented employees and they have several choices to help them meet any need.

This post was originally published February 22, 2018. It was last updated October 9, 2020.

Interested in learning more? Reach out to a Personalized Benefits Advisor today

Topics: Health Reimbursement Arrangement, Qualified Small Employer HRA, Group Coverage HRA, Individual Coverage HRA

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