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Small Business Employee Benefits and HR Blog

HRA for Dummies

May 21, 2019

In the modern workforce, providing competitive benefit options is essential in retaining and recruiting quality employees. For small business owners and managers, navigating the benefits world can be overwhelming and confusing. Maybe you’ve heard of group health insurance alternatives like the HRA, but what is an HRA and how do they work? Where did they come from? Is it an option for your company? Here is a comprehensive “HRA for Dummies” guide, to simplify and streamline your information search.  

What is an HRA?

A health reimbursement arrangement (HRA), sometimes called a health reimbursement account, is an IRS-approved, tax-advantaged health benefit that is sponsored by the employer. It’s used to reimburse employees for out-of-pocket medical expenses and personal health insurance premiums. HRAs are not health savings accounts (HSAs).

2019 and 2020 HRA Comparison Chart. Download Now.

Where did HRAs come from?

In 1974, Congress introduced HRAs as we know them today through the Employee Retirement Income Security Act (ERISA). The HRA has been popular since that time but has evolved to become a more accessible benefit. Recent regulations have introduced new HRA options that are more viable for a lot of small businesses.

So, how does an HRA work?

While there are a few types of HRAs, each slightly different, all HRAs allow an employer to choose a monthly or annual amount with which to reimburse an employee for medical expenses. HRA reimbursements are tax-free to the business, and, depending on the type of HRA and individual employee circumstances, can be tax-free for employees too. Each HRA varies by eligible expenses and participation requirements.

What are the different types HRAs of available in 2019 and 2020, and who is eligible?

    • The QSEHRA: The QSEHRA is available to businesses with fewer than 50 employees that are not currently offering a group health insurance policy. In 2019 a QSEHRA allows businesses to offer up to $5,150 for single employees and $10,450 for employees with a family. Employees can be reimbursed for their own individual health insurance premiums as well as certain out-of-pocket medical expenses. Allowance amounts must be the same among all employees with some differences allowed according to the employees’ age and family size. The employer can make the HRA available to all employees or only full-time employees.
    • The ICHRA: Like the QSEHRA, the individual-coverage HRA (ICHRA) allows employees to be reimbursed for individual health insurance premiums as well as certain out-of-pocket medical expenses. The differences are that businesses of any size can participate in the ICHRA, employers can offer a group plan at the same time, and there are no caps on the annual allowance. Employers can also create employee classes based on job criteria and offer different allowances accordingly. Employees and their families are only eligible for the ICHRA if they have coverage under an individual health insurance policy. If the employee or a participating family member ever loses individual coverage, they can no longer receive reimbursements. We expect the ICHRA to be available beginning 2020.
    • The one-person stand-alone HRA: The one-person stand-alone HRA is available to businesses of all sizes that wish to offer an HRA to just one employee. It can be used to reimburse out of pocket medical expenses as defined in IRC 213(d). It has no allowance caps or group health insurance requirements. Annual rollover is permitted.
    • The retiree HRA: The retiree HRA is only available to a business’s retired employees. Like the one-person stand-alone HRA, businesses of all sizes can offer it, it has no allowance caps or group health insurance requirements, and annual rollover is permitted.

HRA pros and cons

Pros Cons
  • Tax-advantaged account: Employer contributions are tax-deductible.
  • Personalized benefit: HRAs can give employees more freedom with their health care.
  • Cost control: The employer sets contribution limits that work for their budget.
  • Nonportable: A con for employees might be that the plan is employer owned and funded, so they can't take accrued funds with them upon leaving the company.
  • Increased involvement: Because the arrangement is employer owned and funded, it can require a few minutes each month to administer.

An HRA can be an excellent option for small businesses to provide competitive benefits that are personalized to your employees’ needs, without the costs and rigidity of traditional group insurance plans. It’s a flexible benefit that can help you retain and recruit quality employees and give your business a step up on the employment front.

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