Occasionally, the term “healthcare benefit allowance” is mentioned when discussing non-traditional health benefit options. Employers looking for an alternative to traditional group health insurance plans often ask us what a healthcare benefit allowance is.
A healthcare benefit allowance is actually just one of a few names for plans known to the IRS as an employer healthcare arrangement or an employer payment plan.
How an HRA works
Employers can use HRAs to create a flexible health benefit that can fit almost any budget. First, employers decide on a monthly or annual allowance that they’ll make available to employees. Any unused portion of the allowance at the end of the year goes back to the employer.
Employers choose whether to reimburse their employees for both insurance premiums and out-of-pocket expenses, or limit reimbursements to premiums. Employees then use their allowance to get reimbursed for the eligible medical expenses allowed by the HRA.
This gives employees the freedom to choose the insurance plans, healthcare products, and services they want. For example, they can use an HRA toward out-of-pocket medical expenses, and depending on the HRA, they can get reimbursed for individual health insurance premiums. The best part about HRAs is that the allowance is tax-free for both the employee and the employer.
Why choose an HRA instead of a traditional group health insurance plan?
Traditionally, the most common health benefit offered by employers is group health insurance. It can help employees save significantly in some situations, but oftentimes the offered plan doesn’t work for all employees. Those employees are left with a deductible, network, and provider they didn’t choose. Group health insurance is also known for being costly for employers, and these costs are sometimes passed down to employees.
HRAs allow employers to still offer a formal health benefit but also control their costs. With a qualified small employer HRA or an individual coverage HRA, employees aren’t tied to a specific group insurance plan, and Instead, they choose their own individual plan and use the allowance to cover medical costs that are unique to them.
HRAs aren’t only an alternative to group health insurance, though. Some HRAs can be used alongside a group health insurance plan as an additional option for those who don’t qualify or aren’t offered the group plan, or as a supplement to the plan, like an HSA. We’ll cover these options below.
PeopleKeep currently offers three HRA plan types:
Individual Coverage HRA (ICHRA)
An individual coverage HRA (ICHRA) can be offered by organizations of any size. As with any HRA, the employer decides on allowance to offer employees. However, an ICHRA gives employers the ability to decide which employees can participate as well as customize allowance amounts by grouping them into classes.
To participate in an ICHRA, employees are required to be covered by an individual health insurance plan that qualifies as minimum essential coverage (any plan you buy on the health insurance marketplace will qualify). The allowance can then be used to cover the insurance premium and qualified out-of-pocket medical expenses (if their employer allows it).
An ICHRA can also help employers with more than 50 full-time equivalent employees, known as applicable large employers (ALEs), meet all of the requirements of the employer mandate. An ICHRA can be offered within the same organization offering a group health plan, as long as the same classes of employees aren’t offered the choice between both plans. For example, employees living in one state could be offered a group health insurance plan, while employees in another are offered an ICHRA. This makes ICHRAs a particularly flexible option.
Qualified Small Employer HRA (QSEHRA)
Similar to an ICHRA, a qualified small employer HRA (QSEHRA) allows employees to use an employer-provided allowance to cover individual insurance premiums and eligible out-of-pocket medical expenses.
A QSEHRA can only be offered by employers with less than 50 full-time equivalent employees and all full-time employees are automatically enrolled without having to opt in. Employers can choose whether to include part-time employees in the benefit as well, but don’t have the option to group employees into classes like the ICHRA.
Though it can’t be offered alongside group health insurance, it can be a great alternative for employers looking to save and create maximum value out of their spending. With a QSEHRA, every dollar spent goes directly to employees’ needs.
Group coverage HRA (GCHRA)
A group coverage HRA (GCHRA) is designed to supplement a group health insurance plan. To participate, employees must be enrolled in their employer’s group health insurance plan and can only use their allowance toward out-of-pocket medical expenses. Premiums aren’t an eligible expense under a GCHRA.
The purpose of a GCHRA is to allow employers to offer a group insurance plan of their choosing and extend their employees’ coverage through an additional allowance.. Employees use their GCHRA allowance to cover out-of-pocket costs before they meet their annual out-of-pocket maximum. and provide an additional level of budget control for employers. A GCHRA allows employers to offer a traditional group health insurance plan, keep costs low for the organization, and avoid passing on costs to employees.
Though healthcare benefit allowance plans have historically been known by many names, HRAs are the industry standard for these employer payment plans. HRAs are federally recognized, tax advantaged, formal health benefits that fill a gap for:
- Employers with limited budgets.
- Employers who want to better predict their costs
With an HRA, most employers can set an allowance for employees that fits their budget. And in the modern workforce, health benefits have become necessary to attract and retain the right employees.
This article was originally published on March 26, 2013.