How to set up an HRA

Offering a full range of benefits is important for attracting and keeping employees. Health reimbursement arrangements (HRAs) enable business owners to offer an employee health benefit while taking control of their benefits budgets. However, setting one up can seem daunting due to the many regulations and HRA options available.

In this article, we’ll walk you through the essential steps to effectively set up an HRA that supports your workforce and your bottom line.

In this blog post, you'll learn the following:

• What medical expenses you can reimburse with an HRA.
• How you can customize your HRA to meet the needs of your team.
• How PeopleKeep can help you offer an HRA to your employees with ease.

What is an HRA?

An HRA is an employer-funded health benefit. With an HRA, employers can provide tax-free reimbursements to their employees for more than 200 types of eligible medical expenses. Depending on the type of HRA you offer, you can also reimburse individual health insurance premiums.

Some HRA-eligible healthcare expenses include:

• Monthly premiums for health, dental, and vision plans
• Prescription drugs
• Over-the-counter medicine
• Doctor's visits

With an HRA, employers can set their own budget. They set an allowance for their employees. Then, employees submit their eligible expenses to the employer for reimbursement. The employer reimburses those expenses up to their defined allowance amount. This ensures that the employer’s costs are capped and predictable, making HRAs a budget-friendly option.

Plus, unused HRA funds stay with you at the end of the plan year and if an employee leaves your organization. This results in even greater potential cost savings, making HRAs excellent alternatives to traditional group health plans.

Here's how an HRA compares to traditional group health plan coverage:

• An HRA doesn't have steep participation requirements.
• An HRA doesn't have annual rate hikes.
• An HRA offers tax advantages.
• An HRA gives employees more control over their healthcare needs.

How do you set up an HRA?

Establishing an HRA can help employers offer healthcare benefits to employees while managing costs effectively. By following the seven steps below, you can set up an HRA that benefits both your organization and your employees, contributing to a healthier workplace environment.

Step 1: Choose which HRA you want to offer

Start by learning the different types of HRAs you can offer. Each type has different regulations and benefits, so choose the one that aligns best with your business needs and employee demographics.

The most common types of HRAs are:

• The qualified small employer HRA (QSEHRA): QSEHRAs are for employers with fewer than 50 full-time equivalent employees (FTEs) who are typically offering a health benefit for the first time. You can vary allowance amounts based on age or family status, giving older employees or those with families more than younger, single employees. The amount you can offer is capped by the IRS. To participate in a QSEHRA, employees need qualified health plans that provide minimum essential coverage (MEC).
• The individual coverage HRA (ICHRA): Employers of all sizes can offer ICHRAs, and many offer them as an alternative to a group policy. They don't have annual contribution limits, so you can offer your employees as much as you'd like. Plus, you have the ability to differ allowances and benefit eligibility with 11 employee classes, such as full-time or part-time. However, your eligible employees need their own individual health insurance coverage to participate in the ICHRA.
• The group coverage HRA (GCHRA): A GCHRA is exclusive to employers who are already offering traditional group health insurance plans. Employees can use their GCHRA allowance to get reimbursed for qualifying medical expenses they need to pay for before they meet their deductible or out-of-pocket maximum. You can also reimburse them for other expenses that aren't fully paid for by the group plan. Like the ICHRA, there's no maximum limit on employer contributions with a GCHRA.
• The excepted benefit HRA (EBHRA): Like the GCHRA, the EBHRA is meant to supplement an existing group health plan. They allow employers to reimburse employees for excepted benefits only, such as dental or vision expenses. There’s an annual reimbursement limit with the EBHRA.

Step 2: Customize the benefit

One of the biggest advantages of HRAs compared to traditional group health insurance plans is their flexibility. With an HRA, you can customize the benefit so it's personalized for your organization's needs.

Depending on which type of HRA you choose, you'll decide things like:

• How much of a monthly allowance to offer
• What medical expenses are eligible for reimbursement
  • For example, you can offer a QSEHRA or ICHRA that only covers insurance premiums—not out-of-pocket expenses.
• Which employees you want to participate in the benefit
  • With an ICHRA, you can customize eligibility with employee classes. For example, you can offer the benefit to only salaried employees.
  • With a QSEHRA, you can choose to offer the benefit to only full-time employees or allow part-timers to take part as well.
• Waiting periods
  • This is how long new hires must wait (up to 90 days) before they’re eligible for the benefit.
• Employer-sponsored premium reimbursement (ESPR)
  • With a QSEHRA, you can choose to reimburse employees for their portion of a spouse’s group health premium. This is a taxable reimbursement.

Step 3: Choose a start date

Your start date is the date the HRA will begin. The good news is that HRAs can begin at any time, so if you're in a hurry to get something in place, you don't need to wait for an open enrollment period to get started.

If you want to start your plan in the middle of the year, you're also always welcome to start a new plan year when January rolls around to make your plan year match up with the calendar year.

The federal government recommends giving your employees at least 90 days' notice when offering an ICHRA. If you offer an ICHRA through PeopleKeep, we require you to give your employees a minimum of 30 days' notice before your benefit starts.

Step 4: Make needed changes to your current policy

Depending on the HRA you want to offer, you may have to cancel your organization's group policy or remove a class of employees from the policy.

For example, if you offer a QSEHRA, you must cancel any existing group policy. You can’t offer a group plan and a QSEHRA at the same time. So, be sure to coordinate the group plan’s end date with the QSEHRA’s start date. With an ICHRA, you're allowed to keep your group policy, but you need to make sure any employees receiving the ICHRA don't qualify for the group plan.

Finally, for a GCHRA, employees must be participating in a group health insurance plan when the HRA begins.

Step 5: Create and distribute plan documents

You must establish legal plan documents and make them available to your employees, including a plan document and a summary plan description (SPD) outlining the details of your plan.

An HRA administrator can help you with these documents. Otherwise, you'll have to draft your own, usually with the consultation of a legal advisor to ensure your plan is compliant.

Step 6: Tell your employees about your HRA

Once you’ve designed your HRA, it’s time to tell your employees.

Many of your employees may have never used an HRA before, so you'll want to clearly:

• Communicate the benefits of the HRA
• Explain how it works
• Let them know when it's starting

If you choose to offer a QSEHRA or an ICHRA, you should also provide resources to help your employees purchase individual health insurance coverage.

After all, KFF¹ found that more than 60% of Americans younger than 65 had employment-sponsored health insurance in 2023. So, many of your employees may never have had individual health coverage before.

This doesn't involve advising your employees on which policies to buy. Instead, your organization should make it as easy as possible for employees to purchase policies. You can do this either by coordinating with a benefits advisor to help your employees choose and purchase a policy or by directing them to an online service that does the same thing.

Step 7: Monitor and evaluate your HRA

You're not done yet! Even after you've set up your HRA, it will require ongoing attention and maintenance on your part.

You need to make sure your HRA complies with federal regulations, including IRS guidelines and Affordable Care Act (ACA) provisions. This means keeping yourself up-to-date on any changes in healthcare laws and reviewing your HRA plan periodically for compliance.

You should also keep an eye on the HRA's usage and gather employee feedback. This will help you see how well it works and whether you need to make changes later. Regular reviews can also help you spot problems and find ways to improve your benefit.

Keep things simple with PeopleKeep

Setting up and administering an HRA on your own can be challenging. If you want to make this process simpler, you should work with an HRA administrator like PeopleKeep. We take the hassle out of health benefits by handling the time-consuming tasks for you. This frees up more time for you to focus on other areas of your business.

PeopleKeep simplifies and streamlines the HRA process by:

• Generating HRA plan documents
• Helping with HRA plan design. Our software walks you through each step of the HRA setup process.
• Making it easy to invite and send notices to employees
• Reminding you when Form 720 PCORI fees are due
• Reviewing employee reimbursement requests for their eligible health expenses
  • Our team reviews HRA claims to ensure all submissions meet IRS requirements. This also protects you and your employees from coming in contact with protected health information under HIPAA.
• Storing documents and substantiation for employee reimbursement requests
• Providing award-winning customer support

Plus, your employees can shop for individual health plans directly from their PeopleKeep account. Our integrated shopping experience guides them toward finding the right health coverage that fits their needs.

Conclusion

Offering an HRA to your employees is a great way to help them afford their medical costs. But establishing an HRA requires thoughtful planning and a clear understanding of both your organization’s goals and your employees’ needs. From compliance requirements to setting allowances, each step is crucial to ensure that the arrangement not only benefits your employees but also aligns with your company’s financial strategies.

PeopleKeep has helped thousands of organizations set up their own HRA, and we're here to help you, too. Schedule a call with one of our HRA specialists who can guide you through the beginning stages of your new benefit.

This article was originally published on June 4, 2021. It was last updated on November 14, 2024.

1. KFF