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What is a health reimbursement arrangement (HRA)?
A health reimbursement arrangement (HRA), sometimes mistakenly referred to as 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 personal health insurance premiums.
An HRA is not health insurance. Instead, employers offer employees a monthly allowance of tax-free money. Employees then buy the health care services they want, potentially including health insurance, and the employer reimburses them up to their allowance amount.
An HRA plan is an excellent way to provide health insurance benefits and allow employees to pay for a wide range of medical expenses not covered by insurance. It's an especially good option for small businesses that can't afford to offer group health insurance, as the business can choose the amount of the allowance to offer its employees.
How does an HRA work?
Health reimbursement arrangements are notional arrangements; no funds are expensed until reimbursements are paid. Through HRAs, employers reimburse employees directly only after the employees incur approved medical expenses. This feature is especially helpful for businesses that want to retain control over their cash flow.
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, because HRAs are notional arrangements, businesses don't need to pre-fund the HRA.
Second, HRAs allow some rollover. Depending on which HRA plan an employer chooses, health reimbursement arrangement balances may roll forward from month to month or from year to year. QSEHRAs may roll forward from month to month only, for example; annual rollover must still abide by the QSEHRA's annual allowance caps.
Employers may also allow employees to have access to their health reimbursement arrangement accounts after retirement.
What can be reimbursed with an HRA?
A health reimbursement arrangement can reimburse any expense considered to be a qualified medical expense under IRS Section 213(d) of the Internal Revenue Code (also listed in IRS Publication 502), including premiums for personal health insurance policies. Because an HRA can reimburse medical expenses as well as premiums, it's a very valuable benefit for employees in many insurance situations.
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 2020?
HRAs have undergone a lot of regulatory change since their introduction in the 1970s. Today, businesses can choose between six different HRAs:
1. 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.
2020 QSEHRA Allowance Amounts:
In 2020, employers can offer up to $5,250 ($437.50 per month) per self-only employee and $10,600 ($883.33 per month) per employee with a family. 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.
2. The individual coverage HRA (ICHRA)
The individual coverage HRA works much like the QSEHRA, though with fewer restrictions. It is available to businesses of all sizes, comes with no contribution limits, and allows businesses to offer different allowance amounts based on certain employee classes. However, the individual coverage HRA is only 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.
3. 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.
4. The Excepted Benefit HRA
Much like the group coverage HRA, an Excepted Benefit HRA is used to reimburse medical care expenses in addition to other excepted benefits. While the group coverage HRA is typically used to reimburse employees for out-of-pocket expenses, the excepted benefit HRA can also used to reimburse employees for excepted benefits.
5. 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.
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.
QSEHRA vs. group coverage HRA vs. one-person HRA vs. retiree HRA
Here's a table to explain how the QSEHRA, group coverage HRA, one-person HRA, and retiree HRA compare with each other.
|Category||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 reporting features make real-time monitoring of HRA liabilities, reimbursements, and utilization easy. Employers can change plan benefits at any time or cancel the entire plan at any time, provided those offering QSEHRAs supply employees with the required notice.
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.