What is an HRA?

What are HRAs?

An HRA, sometimes mistakenly called a health reimbursement account, is an IRS-approved, tax-free health benefit used to reimburse employees for out-of-pocket medical expenses and, in some cases, individual health insurance premiums. An HRA is an employer-funded benefit, which means there are no employee contributions.

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 a 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 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:

• Qualified small employer HRA (QSEHRA)
• Individual coverage HRA (ICHRA)
• Integrated HRA, also known as a group coverage HRA (GCHRA)
• Excepted benefit HRA (EBHRA)
• Dental/vision HRA
• Retiree HRA

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.

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 by the employer. 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 as long as they have minimum essential coverage (MEC).

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 their eligible 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 is an eligible expense that meets these 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 roll over HRA funds, the option varies by HRA plan. Depending on your type of plan, unused funds can roll over from month to month or 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 limit for allowances.

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

Only monthly rollover is permitted if you're offering an HRA with PeopleKeep.

How is an HRA different from a health savings account?

HRAs are often confused with health savings accounts (HSAs), but they have their differences. An HSA is a tax-advantaged health account for employees covered by an HSA-qualified high deductible health plan (HDHP). It 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.

What expenses qualify for reimbursement under an HRA?

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 both medical expenses and insurance 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.

What are the different types of HRAs?

HRAs have undergone many changes over the years and continue to grow in popularity. Now, businesses can choose between six 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 designed for employers with fewer than 50 full-time equivalent employees (FTEs) that don't offer traditional group health insurance. With the QSEHRA, employers can set an allowance for employees according to their individual or family status.

QSEHRAs have contribution limits that are set by the IRS each year. Allowance amounts typically roll over from month to month. The QSEHRA must be offered to all full-time W-2 employees. Additionally, businesses can choose to offer it to part-time employees as long as they receive the same allowance as full-time employees. Reimbursements are also free from income tax for employees, as long as their policy provides MEC.

2. Individual coverage HRA (ICHRA)

The ICHRA works much like the QSEHRA, but it’s available to organizations of all sizes. It comes with no contribution limits and allows businesses to offer different allowance amounts based on 11 employee classes. This allows employers to categorize employees into groups and make it easier to customize benefits.

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.

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 company 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. Common types of expenses that are eligible for reimbursement with an integrated HRA include copays, co-insurance, and expenses paid before the deductible is met.

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.

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 monthly 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 limits¹ set by the IRS that are adjusted yearly for inflation.

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.

HRA comparison chart

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 to employees, 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 benefits like 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 competitive 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 software features make real-time monitoring of HRA liabilities, reimbursement of benefits, 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 administration platform like PeopleKeep to perform documentation reviews, provide customer support, and generate your plan document can reduce potential compliance complications and HIPAA privacy violations.

In fact, PeopleKeep allows small businesses to spend ten minutes a month or less administering health benefits to their employees, leaving employers more time to focus on running their company.

Conclusion

With an HRA, you can help stretch the value of healthcare dollars for your employees. Employers can control their costs while providing a formal benefit that allows employees to pay for personal medical care. Determining which type of 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.

Let us help you find your perfect HRA match! Schedule a call with one of our personalized benefits advisors and learn how PeopleKeep can help you administer an HRA for your business.

This article was originally published on December 31, 2019. It was last updated on April 11, 2023.

1. https://www.ebcflex.com/2022hsalimits/