Small Business Employee Benefits and HR Blog

Which HRA is right for my organization?

A beginner’s guide to choosing a health reimbursement arrangement

November 1, 2019
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The number of health reimbursement arrangements (HRAs) currently available to employers will grow in January 2020. With all the options on the market, employers considering an HRA need to be well informed.

HRAs can be an excellent option for employers both small and large, including 501c nonprofit organizations that want to offer their W-2 employees a health benefit.

 In this post, we’ll discuss the most common HRA options, how they work, what the eligibility requirements are, and which option might be best for certain business goals. 

Let take a look at the options:

1.  The QSEHRA

 The qualified small employer health reimbursement arrangement (QSEHRA) was created by federal legislation in December 2016. Through a QSEHRA, a small business can offer employees a monthly allowance of tax-free money to reimburse employees. The employees can be reimbursed for their insurance premiums and certain eligible out-of-pocket medical expenses like doctor visit copays, vision care, dental care, prescriptions, and more. 

There are limits on how much an employer is allowed to contribute through the QSEHRA in a given year. For 2019, the limit is $5,150 for single employees and $10,450 for families. Information regarding the amounts allowed to be offered in 2020 will be released by the federal government in the coming weeks. Until then, employers can expect an increase of around 3 to 5 percent from 2019 amounts.  

A QSEHRA is available only to qualified small employers (companies with fewer than 50 employees). The company’s full-time employees are automatically eligible to participate. The company can choose to also include part-time employees. If part-time employees are included, the benefit must be offered the same way to both employment statuses. That means all eligible employees should be offered the same allowance varying only by family status. Businesses with over 50 employees, or that offer a group plan or any other HRA, can’t offer a QSEHRA. 

One thing to pay attention to is how the QSEHRA coordinates with premium tax credits. If an employee that qualifies for a premium tax credit is also eligible for the QSEHRA based on their employment status, the tax credit they receive must be reduced by the amount of the QSEHRA allowance they’re offered.

 

The QSEHRA might be best for companies:

  • That don’t offer group health insurance and have no plans to do so
  • With employees who are on their spouse’s insurance
  • With employees on a health care sharing ministry plan or who don’t have health insurance
  • That don’t have a high number of employees eligible for premium tax credits

2. The ICHRA

Available starting January 2020, the individual coverage health reimbursement arrangement (ICHRA), like a QSEHRA, allows a business to offer an allowance of tax-free money for employees. Using the allowance, the business reimburses its employees up to the set allowance amount. 

Unlike the QSEHRA, there aren’t any annual contribution limits with the ICHRA. That means employers can offer their employees as much allowance as they want. 

Businesses can also limit the benefit to specific employee classes, as well as vary allowance amounts between those classes. There’s even an option to offer an allowance to the oldest employees within the same class that’s up to three times higher than the allowance offered to the youngest employees and to differ allowances within the class based on family size.  

The 11 ICHRA employee classes are:

  1. Full-time employees
  2. Part-time employees
  3. Salaried employees
  4. Seasonal employees
  5. Temporary employees working through a staffing agency
  6. Hourly employees
  7. Employees covered under a collective bargaining agreement (unionized employees)
  8. Employees currently in a waiting period
  9. Foreign employees who work abroad
  10. Employees in different locations, based on rating areas
  11. A combination of any of the options listed above

A big draw for larger businesses looking into HRA options is that ICHRA can be offered by businesses of any size.

One important thing to keep in mind is that businesses offering the ICHRA, can’t offer any other HRA at the same time. However, they can offer a group health insurance policy, so long as they don’t offer the same employee classes a choice between the group policy and the ICHRA. 

Another distinction of the ICHRA compared to other options is that for an employee to be eligible to participate, they must have individual insurance coverage. 

Employees can’t use a premium tax credit and participate in the ICHRA. That said, they can forgo their premium tax credit and participate, or they can opt out of the ICHRA and collect their premium tax credit if the HRA allowance amount is considered unaffordable.

The ICHRA might be best suited for companies:

  • That want to vary allowances and/or limit eligibility by one or more of the 11 class options.
  • That want to offer an allowance higher than the QSEHRA’s annual contribution limits.
  • That have employees with premium tax credits who would like the choice to either participate in the ICHRA or opt out.
  • That have a group health insurance plan they want to continue offering.
  • That have few or no employees on a spouse’s group health insurance plan or with other non-individual coverage.

3. The group coverage HRA (integrated HRA)

A group coverage health reimbursement arrangement (group coverage HRA), is a reimbursement plan that is available to employers of any size who offer a traditional group health insurance plan. 

Typically, a company offering the group coverage HRA will purchase a high-deductible group health insurance plan to save money with a lower-cost premium. The employer will then offer an annual allowance be used as a supplement to help with the amounts paid towards the group plan deductible and coinsurance. 

As with the ICHRA, there are no limits on annual allowances. A business offering a group coverage HRA can vary eligibility and allowances based on employee classes. The classes must be based on qualified job-based criteria (e.g., hours worked, job description, location, etc.). All employees that fall within a defined class must be treated equally with regards to allowances and eligibility. It’s important to remember that only employees who are enrolled in the group health insurance plan can participate. 

Employees can use the group coverage HRA to be reimbursed for out-of-pocket medical expenses like copays, prescriptions, vision care, and dental care. With group coverage HRAs, it is common for the plan to be restricted to only reimburse deductible or co-insurance expenses that are also covered under the group health insurance plan but employers can allow other qualified medical expenses to be reimbursed. To verify the employee’s expenses are eligible, an explanation of benefits (EOB) is typically required to be provided with each reimbursement request.

The group HRA might be best for companies:

  • That want to save money on group insurance premiums by offering a higher deductible plan.
  • That want to provide a traditional group insurance plan while still offering an allowance to offset out of pocket costs.
  • With current or potential employees that are drawn to traditional group insurance.

Conclusion

It’s an exciting time for businesses wanting to offer a meaningful health benefit to their employees. With so many health benefit options on the horizon for 2020, employers have the freedom to be selective. With the right information, these businesses can discern which plan will work best for their goals and be the most valuable to their employees. 

To learn even more about the different health benefits available in 2020, check out our other resources on the topic: 

The top 5 small business health benefit options in 2020

Is the QSEHRA or the ICHRA better for my business?

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