A health reimbursement arrangement (HRA), sometimes called a health reimbursement account, is a company-funded, tax-advantaged health benefit used to reimburse employees for personal health care expenses.
An HRA is not health insurance. Instead, businesses offer employees a monthly allowance of tax-free money. Employees then buy the health care services they want, potentially including health insurance, and the business reimburses them up to their allowance amount.
Because businesses can choose the allowance amount they offer employees, HRAs are an especially good option for small businesses that can't afford to offer group health insurance.
HRAs have been a popular benefits option since the 1970s, but they've undergone several changes. In 2018 and 2019, the following HRAs are available and compliant:
- The qualified small employer HRA (QSEHRA)
- The group coverage HRA
- The one-person stand-alone HRA
- The retiree HRA
In this post, we'll go over everything you need to know about HRAs and how to offer them.
A QSEHRA is the perfect option for small businesses that want control over their benefits budget. Learn more about the QSEHRA to see how you can help your employees without breaking the bank.
How does an HRA work?
Although each HRA is different, all HRAs follow the same five-step structure:
- The business sets the allowance amount. Businesses decide how much tax-free money they want to offer employees every month. This represents the maximum the business will reimburse each employee for health care.
- Employees make purchases. Employees then choose the health care products and services that fit their personal needs, potentially including personal health insurance.
- Employees submit proof of expenses incurred. To be reimbursed, employees must submit documentation that shows they incurred an HRA-qualified expense. This documentation is usually given in the form of receipts, but could also be provided by something like an explanation of benefits.
- The business reviews employee documentation. The business reviews employees' documentation for three things: the service or product, the date of the service or sale, and the amount incurred. If it includes these three items and the service or product is HRA-qualified, the business approves the expense.
- The business reimburses employees. After approving the expense, the business reimburses employees from their allowance amount. After the allowance amount has been reached, the business won't make further payments until the next month.
There are a couple other things to keep in mind. First, HRAs are notional arrangements. That means businesses don't need to pre-fund the HRA; no funds are expensed until reimbursements are made. This feature is especially helpful for businesses that want to retain control over their cash flow.
Second, HRAs allow some rollover. Depending on the HRA, allowance amounts may roll over month to month or from year to year.
What can be reimbursed with an HRA?
HRA-eligible expenses are outlined in Section 213(d) of the Internal Revenue Code and include items such as:
- Individual health insurance premiums
- Individual dental or vision premiums
- Amounts paid toward a policy's deductible
- Office visits
- Prescription drugs
- Nonprescription drugs (with a doctor's note)
- Mileage for travel to/from eligible health care
For a total list of reimbursable items, check out our HRA eligible expenses tool.
Different HRAs may restrict certain items from reimbursement. Additionally, the business offering the HRA can choose to eliminate items from eligibility. Many businesses choose to offer a premium-only HRA, for example.
Which HRAs are available in 2019?
HRAs have undergone a lot of regulatory change since their introduction in the 1970s. Today, businesses can choose between four basic HRAs:
- The qualified small employer HRA (QSEHRA). The QSEHRA is by far the most popular HRA currently available. Created in 2016, the QSEHRA is available exclusively to small businesses with fewer than 50 employees. With the QSEHRA, small businesses can offer different allowance amounts to employees based on family size. In 2019, they can offer up to $5,150 ($429.17 a month) per self-only employee and $10,450 ($870.83 a month) per employee with a family in 2019. These amounts roll over month to month and can roll over year to year as well, but total QSEHRA reimbursements should not exceed the annual limits for the year. The QSEHRA is automatically available to all full-time W-2 employees, and businesses can choose to offer it to part-time employees as well (as long as part-time employees receive the same allowance amounts). Businesses cannot offer a QSEHRA at the same time as a group policy.
- The group coverage HRA. As its name suggests, the group coverage HRA is available to businesses who also offer a group health insurance policy. With the group coverage HRA, businesses can offer monthly allowances to cover items not eligible under the group policy, such as the deductible. Businesses of all sizes can offer the group coverage HRA, there are no allowance caps, and businesses can offer different allowance amounts to different employees.
- 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 all expenses listed in IRC 213(d), and it has no allowance caps or group health insurance requirements. Annual rollover is permitted.
- The retiree HRA. The retiree HRA is available solely to a business’s retired employees. It works much 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.
These four HRAs may soon be joined by more. In October 2018, the Departments of the Treasury, Labor, Health and Human Services proposed new regulations that would expand the use of HRAs and effectively create two new ones: the individual coverage HRA and the excepted benefit HRA.
The individual coverage HRA works much like the QSEHRA, though with fewer restrictions. It would be available to businesses of all sizes, come with no contribution limits, and allow businesses to offer different allowance amounts based on certain employee classes. However, the individual coverage HRA would only be available to employees enrolled in individual insurance; employees covered by a family member's group policy or an alternative like Medi-Share couldn't participate.
The excepted benefit HRA is similar to a group coverage HRA. It would be available to businesses with a group health insurance policy and allow the company to reimburse employees for out-of-pocket medical expenses like a dental visit or a short-term health insurance policy. The excepted benefit HRA would be capped at $1,800 per year per employee and couldn't be offered with any other HRA.
These two HRAs are scheduled to go into effect on January 1, 2020.
QSEHRA vs. group coverage HRA vs. one-person HRA vs. retiree HRA
Here's a table to explain how the four currently available HRAs compare with each other.
|QSEHRA||Group coverage HRA||One-person stand-alone HRA||Retiree HRA|
|Business size restrictions||Available only to businesses 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 a group health insurance policy.||Must be offered alongside a group health insurance policy.||None.||None.|
|Employee eligibility guidelines||All full-time employees are automatically eligible. The business may choose to include part-time employees as well, as long as they're offered the same allowance amount as full-time employees.||Only available to employees also covered by the business'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 caps||$5,150 for self-only employees and $10,450 for employees with a family in 2019||None.||None.||None.|
|Contribution guidelines||Businesses can offer different allowance amounts based on whether the employee is self-only or has a family.||Businesses can offer different allowance amounts to different employees based on legitimate job criteria.||N/A/||Businesses can offer different allowance amounts to different employees based on legitimate job criteria.|
|Rollover guidelines||Can roll over month to month and year to year too, though total QSEHRA reimbursements can't exceed that year's maximum allowance amounts.||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 the right choice for my business?
An HRA can be a great choice, particularly for small businesses.
To determine whether an HRA is a good fit for your business, first ensure you meet the HRA's eligibility guidelines. To offer a QSEHRA, for example, you must be a qualified small employer with fewer than 50 employees and without any group insurance policy.
Next, determine what you can afford to spend on health benefits. If you can afford a group health insurance policy with a low deductible, you may not want to offer an HRA. If you can only afford a high-deductible health policy, you may choose a group coverage HRA to complement it. Finally, if you can't afford group health insurance at all, a QSEHRA is a good choice.
Finally, consider whether the HRA would suit your employees. If your small business has a lot of employees on a family member's policy or who live out of state, for example, the QSEHRA is a great solution.
Generally, the more diverse your employees and the more budget-conscious your business, the better fit an HRA can be.
Should I use an HRA administrator?
Businesses offering an HRA should always use an HRA administrator. Without one, it's easy to run into compliance trouble and HIPAA privacy violations.
HRA administration software automates the process, creating plan documents, updating the HRA with regulatory changes, and reviewing and approving employee expense submissions.
In fact, HRA administrators like PeopleKeep allow small businesses to spend 10 minutes a month or less administering the benefit.
An HRA is a good choice for small businesses that don't want to deal with group health insurance that is often too expensive, too complex, and too one-size-fits-all.
With an HRA, businesses can control their costs while providing a formal benefit that allows employees to buy what suits their personal needs.
To learn more about how PeopleKeep can help you administer an HRA for your business, click here.
Editor's Note: This post was originally published in January 2012. It has been updated to provide the most timely and accurate information on HRAs.
What questions do you have about health reimbursement arrangements (HRAs)? Leave a comment and we'll help answer them.