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Small Business Employee Benefits and HR Blog

How Does an HRA Work?

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

But small businesses recognize that dropping benefits altogether isn't a solution. Instead, many have begun adopting personalized health benefits. With personalized health benefits, small businesses give employees tax-free money to spend on the health care products they find most valuable.

These benefits help businesses control costs while reducing administrative requirements and giving employees greater flexibility.

One of the most popular forms of personalized health benefits is the health reimbursement arrangement (HRA). With an HRA, a company offers employees a monthly allowance, and employees buy what fits their needs. The company 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 small businesses 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 personalized benefits automation software—a new administration choice among small businesses.

How an HRA works

All HRAs follow a simple, four-step process.

Step 1: The company chooses a monthly benefit allowance of tax-free money to offer each employee. Depending on the type of HRA, the company may be able to offer different allowance amounts to different employees based on bona fide job criteria.

Businesses don’t need to prefund these allowances.

Step 2: Employees buy what fits their personal needs. They receive no input from the company during this process, though the company usually has some say in which expenses are eligible for the benefit. Broadly, employees can receive reimbursement for any item listed in IRS Code Section 213(d), including personal insurance premiums.

Step 3: After the employee incurs an eligible expense, they submit proof of the expense to their company. 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.

Step 4: The company 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 company must follow a declined claims and appeals process outlined in their HRA plan documents.

Typically, small businesses include the tax-free reimbursement in the employee’s next regular paycheck.

How the stand-alone HRA works

One of the first available HRAs was the stand-alone HRA. This HRA was available to businesses regardless of size and followed the above structure exactly.

The stand-alone HRA was widely used before 2014, when the IRS and the Departments of Labor and Health and Human Services issued guidance on the Affordable Care Act that seriously limited it.

According to the Departments’ guidance, the HRA is a group health plan and must comply with the ACA’s requirements for group plans. These requirements include a prohibition on annual limits and a mandate to cover preventive services. The Departments found that the stand-alone HRA violated these requirements, and businesses could no longer use the stand-alone HRA to pay their employees’ individual premiums. 

Note: In 2017, President Donald Trump issued an executive order directing the Secretaries of the Treasury, Labor, and Health and Human Services to consider how to expand the flexibility and use of HRAs. If followed, this executive order could effectively bring back the stand-alone HRA.

How the 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 businesses with fewer than 50 employees.

The QSEHRA follows the basic structure of the HRA, but includes some limitations not seen with the stand-alone HRA.

We’ll go over the four-step process again, noting where the QSEHRA differs from the stand-alone HRA.

Step 1: The company chooses a monthly benefit allowance of tax-free money to offer each employee. In 2018, annual employee allowances are limited to $5,050 for self-only employees and $10,250 for employees with a family.

These allowances must be offered to all eligible employees, and a company 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.

Step 2: Employees buy what fits their personal needs. They can be reimbursed for any item listed in IRS Code Section 213(d), though the business may choose to limit this list if it wants to.

Step 3: After the employee incurs an eligible expense, they submit proof of the expense to their company. This documentation must include a description of the product or service, the cost of the expense, and the date the employee incurred the expense.

Step 4: The company 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 company must follow a declined claims and appeals process outlined in their HRA plan documents.

How the one-person stand-alone HRA works

Another HRA currently available is the one-person stand-alone HRA.

When the IRS and the Departments of Labor and Health and Human Services issued their 2014 guidance, they made an exception for stand-alone HRAs set up for just one person.

One-person stand-alone HRAs follow the basic structure of the HRA, but must include eligibility requirements that limit participation to one employee.

Here is the four-step process again, with the specific requirements for one-person stand-alone HRAs noted.

Step 1: The company sets HRA eligibility guidelines based on bona fide job criteria that result in just one employee being eligible for the benefit. Then, the company chooses a monthly allowance of tax-free money to offer the employee.

There are no contribution limits for a one-person stand-alone HRA.

Step 2: The employee buys what fits their personal needs. They can be reimbursed for any item listed in IRS Code Section 213(d), though the business may choose to limit this list if it wants to.

Step 3: After the employee incurs an eligible expense, they submit proof of the expense to their company. This documentation must include a description of the product or service, the cost of the expense, and the date the employee incurred the expense.

Step 4: The company reviews the employee’s submission and, if it qualifies, the company reimburses the employee from the monthly allowance for that expense.

If it doesn’t qualify, the company must follow a declined claims and appeals process outlined in their HRA plan documents.

How the integrated HRA works

Apart from the QSEHRA and the one-person stand-alone HRA, businesses that want to use an HRA are currently limited to the integrated HRA.

The integrated HRA is an HRA integrated with a group health insurance policy. These HRAs are available to businesses of all sizes, and are typically offered alongside a high-deductible group policy.

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

Step 1: The company chooses a monthly benefit allowance of tax-free money to offer each employee. The company 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 company’s group health insurance policy.

Step 2: Employees buy what fits their personal needs. They receive no input from the company during this process, though the company usually has some say in which expenses are eligible for the benefit.

Usually, the company chooses to only reimburse deductible or coinsurance expenses that are also covered under the group health insurance plan. More broadly, employees can be reimbursed for any item listed in IRS Code Section 213(d), apart from personal insurance premiums.

Step 3: After the employee incurs an eligible expense, they submit proof of the expense to their company. This documentation must include a description of the product or service, the cost of the expense, and the date the employee incurred the expense.

Step 4: The company 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 company must follow a declined claims and appeals process outlined in their HRA plan documents.

Stand-alone HRA vs. QSEHRA vs. one-person stand-alone HRA vs. integrated HRA

It can be difficult to keep track of the many differences between the stand-alone HRA, the QSEHRA, the one-person stand-alone HRA, and the integrated HRA.

Here’s a chart to help you compare each HRA and how they work.

  Stand-alone HRA QSEHRA Integrated HRA One-person stand-alone HRA
Compliance status Not currently compliant Currently compliant Currently compliant Currently compliant
Business size restriction None Limited to businesses with fewer than 50 employees None Limited to one benefit participant
Employee eligibility guidelines None All full-time employees are eligible. Businesses can decide on part-time employee eligibility. Only employees enrolled in the company's group health insurance policy may be eligible Only one employee may be eligible
Group health policy requirements None Can't be offered with a group health policy Must be offered with a group health policy None
Allowance restrictions No minimum or maximum contribution requirements. Businesses can give different employees different allowances based on bona fide job criteria. Limited to $5,050 for self-only employees and $10,250 for employees with a family in 2018. Businesses can't give different employees different allowances based on any criteria apart from family status. No minimum or maximum contribution requirements. Businesses can give different employees different allowances based on bona fide job criteria. No minimum or maximum contribution requirements
Individual health policies permitted Yes Yes No Yes
Premium tax credit coordination requirements Employees can only receive reimbursements for the sum of their premium after premium tax credits have been applied Employees must reduce their premium tax credit by the amount of their HRA allowance These HRAs can't reimburse employees for individual premiums Employees can only receive reimbursements for the sum of their premium after premium tax credits have been applied
Medical expenses available for reimbursement Any or all items listed in IRS Code Section 213(d) Any or all items listed in IRS Code Section 213(d) Any or all items listed in IRS Code Section 213(d), with the exception of personal insurance premiums Any or all items listed in IRS Code Section 213(d)

HRA administration with personalized benefits automation software

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 businesses choose to administer their HRA with personalized benefits automation software.

With personalized benefits automation software, such as PeopleKeep, small businesses can significantly reduce their administration time, avoid privacy issues, and stay on top of changing health care policy. These platforms take care of the heavy lifting and, in the case of PeopleKeep, require an average 5 to 15 minutes a month to offer the benefit.

Conclusion

As a personalized health benefit, the HRA is a powerful tool for small businesses looking to hire and keep talented employees. Its structure is easy to understand and, with the right support, easy to administer.

With traditional group health benefits costs continuing to rise, the HRA will become increasingly popular and—eventually—will help personalized benefits become the dominant way small businesses offer the employee benefits.