BOOK A CONSULTATION

What is an HRA?

Written by: Elizabeth Walker
Share:
Published on April 8, 2022.

Offering a health benefit is a big decision for employers. When looking for the perfect health benefit, employers need to consider things like cost, flexibility, and health services covered. An increasingly popular option is the health reimbursement arrangement (HRA).

HRAs can be very beneficial for your organization. They are tax-advantaged for employers and help employees pay for their out-of-pocket medical expenses. However, there are a variety of HRAs, so employers need to understand how each works before making a decision.

In this article, we’ll go over HRAs, including how they work, how they differ from HSAs, what qualifies for reimbursement, various HRA types, and how they compare.

We’ll also help you determine if an HRA is the right choice for your business and why you should use an HRA administrator.

New to HRAs? Get our comparison chart for a side-by-side look at the top HRAs

What is an HRA?

An HRA, sometimes mistakenly called a health reimbursement account, is an IRS-approved, employer-funded, tax-advantaged health benefit used to reimburse employees for out-of-pocket medical expenses and, in some cases, health insurance premiums.

An HRA isn’t health insurance. Instead, employers offer employees a monthly allowance of tax-free money dedicated to health spending. Employees buy healthcare services, and sometimes health insurance, that meets their needs, and their employer schedules HRA reimbursement up to a set allowance amount.

HRAs are an excellent way to provide a well-rounded health benefit and allow employees to pay for the specific medical expenses that meet their individual needs. It's an especially budget-friendly option for small businesses that can't afford a group health insurance plan.

The types of HRAs available include:

Keep in mind that within the different HRAs, employers still have a lot of flexibility when it comes to designing the benefit, which is one of the most appealing advantages of an HRA.

Take our HRA quiz to find out which HRA is right for your organization

How does an HRA work?

The way HRAs work is simple. HRAs are unfunded notional accounts with no cash value. This means that no HRA funds are released until reimbursements are paid. Through HRAs, employers reimburse employees directly after they incur an eligible healthcare expense.

Employer contributions are tax-deductible and payroll tax-free, and the money employees receive is free of income taxes.

Although each HRA is different, all HRAs follow the same five-step structure:

  1. The business sets the allowance amount. Employers decide the maximum amount of tax-free money they want to offer employees for healthcare expenses.
  2. Employees make purchases. Employees choose the healthcare products and services that fit their needs, potentially including individual health insurance.
  3. Employees submit proof of the expense incurred. Employees submit documentation that shows they incurred an eligible medical expense to be reimbursed. This documentation is usually given in the form of a receipt or invoice.
  4. The business reviews employee documentation. The employer reviews employees' documentation for three things: the service or product, the date of the service or sale, and the amount incurred. If it meets this criteria, the expense is approved.
  5. The business reimburses employees. After approving the expense, the company reimburses employees from their set allowance amount. Once the allowance is reached, the employee can’t exceed it.

If you’d like to rollover HRA funds, the option varies by HRA plan. Depending on which HRA you choose, HRA funds can rollover from month to month or from year to year.

For example, QSEHRAs may roll over from month to month or year to year. But any annual rollover must still abide by the QSEHRA's annual allowance caps.

However, with one-person, standalone HRAs or integrated HRAs, employers can allow balances to accrue monthly and annually. They also have the option not to allow any annual rollover.

If you’re offering an HRA with PeopleKeep, only monthly rollover is permitted.

See how an HRA will benefit your employees in our webinar

How is an HRA different from a health savings account?

HRAs are often confused for health savings accounts (HSAs), but they have their differences. An HSA is a tax-advantaged account for employees covered by an HSA-qualified high deductible health plan (HDHP) and can be used for qualified medical expenses, such as medical, dental and vision care, and prescription drugs.

The main difference between the two health benefits is that the employer owns the HRA and the employee owns the HSA. This means if an employee with an HRA leaves an organization, the unused HRA dollars stay with the employer, similar to a flexible spending account (FSA).

Another significant difference is how you fund the two accounts. The money in an HRA is provided solely by the employer. With an HSA, both the employer and the employee can contribute to the account. Unlike certain HRAs, like an integrated HRA, HSAs have annual contribution limits.

Explore more ways HRAs are different from HSAs and FSAs in our comparison chart

What expenses qualify for HRA reimbursement?

While employees don’t own any of the money in an HRA, they still enjoy tax-free purchases on any qualified medical expense. HRAs can reimburse any qualified expense under IRS Section 213(d) of the Internal Revenue Code, listed in IRS Publication 502.

Because an HRA can reimburse medical expenses and premiums, it's a valuable employee benefit to help lower the overall cost of healthcare.

Different HRAs may restrict certain items from reimbursement. Additionally, the employer offering the HRA can choose to eliminate items from eligibility. Many businesses choose to offer a premium-only HRA, for example, which only reimburses insurance premiums.

See what you can get reimbursed with an HRA in our infographic

What are the different types of HRAs?

HRAs have gone through many changes over the years, and they continue to grow in popularity. Nowadays, businesses can choose between seven different HRAs to offer their employees.

Let’s briefly dive into each option below to give you a better idea of how they work.

1. Qualified small employer HRA (QSEHRA)

The QSEHRA is a popular stand-alone health benefit for small businesses. It is specifically for employers with fewer than 50 full-time equivalent employees (FTEs) that don’t offer group health insurance. With the QSEHRA, small businesses can offer different allowance amounts to employees according to their individual or family status.

QSEHRAs have contribution limits that are set by the IRS each year. These amounts typically roll over from month to month. The QSEHRA is available to all full-time W-2 employees. Still, businesses can offer it to part-time employees as long as part-time employees receive the same allowance amounts as full-time employees.

Find out seven ways to budget your QSEHRA health benefit in our eBook

2. Individual coverage HRA (ICHRA)

The ICHRA works much like the QSEHRA, though with fewer restrictions. It’s for businesses of all sizes, comes with no contribution limits, and allows businesses to offer different allowance amounts based on certain employee classes.

However, the ICHRA is only available to employees with an individual health insurance policy. Therefore, employees covered by a family member's group policy or an alternative like Medi-Share can’t participate in the benefit.

Which is better for your organization—the QSEHRA or the ICHRA? Get our chart to find out

3. Integrated HRA

The integrated HRA, or group coverage HRA (GCHRA), is available to businesses of all sizes that offer a group health insurance policy. In this case, only employees who opt into the health plan can take advantage of the HRA.

With an integrated HRA, employers can offer monthly allowances for employees to pay for any eligible expense not fully paid for in their group health insurance policy, such as deductibles, coinsurance, and other healthcare items listed in IRS Publication 502.

An equally flexible option, businesses of all sizes can offer the integrated HRA. There are no allowance limits, and, like the ICHRA, employers can offer different allowance amounts based on employee classes.

Get more detail on integrated and stand-alone HRAs by reading our blog

4. Excepted benefit HRA (EBHRA)

Much like the integrated HRA, an EBHRA is used in conjunction with a group health plan. While the integrated HRA is typically used to reimburse employees for out-of-pocket expenses, the excepted benefit HRA is used to reimburse employees for excepted benefits.

Companies of any size may offer an EBHRA, which covers “excepted” benefits only, such as copays, deductibles, and premiums for vision and dental. EBHRAs can also cover COBRA insurance, long-term care, and short-term care. It must be offered to every employee on the same terms.

Like the QSHERA, EBHRAs have annual contribution limits set by the IRS that are adjusted yearly to allow for inflation.

Read more about how the EBHRA compares to the GCHRA in our blog

5. Retiree HRA

The retiree HRA is available solely to a business’s retired employees. Businesses of all sizes can offer this HRA, it has no allowance caps or group health insurance requirements, and annual rollover is permitted if allowed by the employer.

6. Dental/vision HRA

Employers who also want to provide dental and vision benefits to employees can utilize a dental/vision HRA to make reimbursements exclusively for these expenses. These types of limited HRAs have a very narrow focus and are often paired with HSA to reimburse employees for expenses exempt from the HSA deductible requirement.

If you’re looking to implement an HRA in conjunction with your group health plan, but want to cover fewer out-of-pocket expenses, then a dental/vision HRA is a better choice than the more expansive integrated HRA.

7. One-person, standalone HRA

As the name suggests, this HRA’s eligibility requirements must be structured so that only one employee can participate. It is available to any business, has no allowance restrictions, and has no group health insurance requirements.

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

Understanding how each HRA functions can be confusing. To make their differences clearer, the chart below explains how most HRAs compare to each other.

Category

QSEHRA

Integrated HRA

One-person stand-alone HRA

Retiree HRA

Employer size restrictions

Available only to employers with fewer than 50 employees.

None.

None, though the HRA may only cover one employee.

None.

Group coverage requirements

Can't be offered if the business also offers group health insurance.

Must be offered alongside a group health insurance policy.

None.

None.

Employee eligibility guidelines

All full-time employees are automatically eligible. Employers can include part-time employees, as long as they're offered the same allowance amount as full-time employees.

Only available to employees also covered by the company’s group health insurance policy.

The business must structure HRA eligibility so that only one employee is eligible.

Only available to retired employees.

Annual contribution limits?

Yes, annual contribution limits are set by the IRS.

None.

None.

None.

Contribution guidelines

Businesses can offer different allowance amounts based on whether the employee is an individual or has a family.

Businesses can offer different allowance amounts to different employee classes based on job criteria.

N/A

Businesses can offer different allowance amounts to different employee classes based on job criteria.

Rollover guidelines

Can roll over month to month and year to year. However, total QSEHRA amounts can't exceed the annual maximum allowance limit.

Can roll over month to month and year to year.

Can roll over month to month and year to year.

Can roll over month to month and year to year.

Is an HRA a good idea for my business?

If you’re searching for a simple way to offer an affordable and flexible health benefit, an HRA is worth considering.

HRAs provide the following advantages for employers:

  • Better cost control with the ability to set a budget-friendly allowance.
  • Tax-deductible employer contributions and payroll tax exemptions.
  • Customizable benefit design to best suit the organization’s and employees’ needs.
  • Provides lower risk than other health benefit options by not paying out until reimbursement.
  • Helps employers attract and retain talent by boosting your employee benefits package.

To determine whether an HRA is a good fit for your business, first ensure you meet the HRA's eligibility guidelines. For example, to offer a QSEHRA, you must have fewer than 50 employees and no group health insurance policy.

Next, determine your budget. If you can afford a group health insurance policy, you may choose an integrated HRA to supplement it. However, if you can't afford group health insurance, a QSEHRA is a strong choice.

Finally, consider whether the HRA would suit your employees. For example, If your small business has a lot of employees on a family member's insurance policy or who live out of state, the QSEHRA is an excellent solution. However, if you want to set different allowance amounts, an ICHRA would be a better fit.

Generally, the more diverse your employees and the more budget-conscious your business, the better fit an HRA can be.

Should employers use an HRA administrator?

Companies offering an HRA should always use an HRA administrator. HRA administration features make real-time monitoring of HRA liabilities, reimbursement, and utilization easy.

Employers can change or cancel health plan benefits at any time, provided those offering a QSEHRA give employees the required notice.

Organizations can choose to self-administer their HRA, but using an HRA administrator, like PeopleKeep, to perform documentation review, provide customer support, and generate your plan document can reduce potential compliance complications and HIPAA privacy violations.

In fact, HRA administrators like PeopleKeep allow small businesses to spend ten minutes a month or less administering their benefits, leaving employers more time to focus on running their company.

Learn everything you need to know about HRA compliance in our guide

Conclusion

With an HRA, employers can control their costs while providing a formal benefit that allows employees to pay for personal medical care. Determining which HRA is the best for your business depends on factors like company size and whether or not you have group health insurance. But for many employers, the flexibility an HRA offers is the primary motivator.

If you think an HRA is right for your organization, we can help. Find your perfect HRA match by contacting our personalized benefits advisors and learn how PeopleKeep can administer an HRA for your business.

This article was originally published on December 31, 2019. It was last updated on April 8, 2022.

Originally published on April 8, 2022. Last updated April 8, 2022.
Share:

Comments

Additional Resources

View All Resources