Guide to Health Reimbursement Arrangements (HRAs)
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With the cost of healthcare steadily rising each year, employers are left wondering how they can offer a personalized and powerful health benefit to stay competitive in today’s labor market without going over budget or dealing with the ins-and-outs of compliance. By offering a health reimbursement arrangement, employers of any size can offer a cost-controlled health benefit that’s more inclusive and tailored than the one-size-fits-all approach a group health plan provides.
Topics covered in this guide include:
What is a health reimbursement arrangement?
A health reimbursement arrangement (HRA) is an IRS-approved, employer-funded health benefit used to reimburse employees, tax-free, for their healthcare expenses, including health insurance premiums, out-of-pocket medical expenses, or a combination of the two.
Many employers prefer to offer HRAs like the qualified small employer HRA (QSEHRA) or the individual coverage HRA (ICHRA) as an alternative to group health insurance because of the budget control, tax advantages, and flexibility HRAs offer. However, some types of HRAs can be integrated with a group health insurance plan as a supplemental benefit in lieu of an HSA, or offered as an alternative benefit for a select group of employees who may not qualify for your group health insurance plan.
What are the benefits of HRAs?
Accessible to all employers
Traditional group health insurance coverage isn’t the best option for many employers because of its complexity, unpredictable costs, and strict requirements. An HRA is a more accessible alternative that isn’t subject to annual rate hikes and has no participation or minimum contribution requirements. Employers simply set a monthly benefit allowance and employees use their allowance on any qualified medical expense they choose.
While a group health insurance plan lumps employees into a one-size-fits-all plan, giving them no agency over their coverage, network, or premium amount, an HRA empowers employees to personally choose an individual insurance plan that works for them. Each employee can use the benefit differently to purchase the expenses that make sense for their personal health, budget, and family situation.
With an HRA, reimbursements are free of payroll taxes for employers. What’s more, if employees are covered by a policy providing minimum essential coverage (MEC), such as a plan purchased on the state or federal marketplaces, their HRA funds are also free of income taxes.
How does an HRA work?
If you’re new to offering an HRA through an administration software platform, we can help. At PeopleKeep, we’re experts on HRA administration and help thousands of employers reimburse their employees every day.
Step 1: Design your benefit
First, employers design their HRA benefit so it’s uniquely suited to the needs of their employees. When setting up your HRA, you’ll decide how much tax-free money you want to offer to employees each month, which expenses you’d like to be eligible for reimbursement, and, depending on the type of HRA you’re offering, potentially decide if you’d like to offer different benefits to employees in different groups.
Step 2: Employees make healthcare purchases
Once your benefit is set up, employees are ready to spend their allowance. Employees offered a QSEHRA or ICHRA will purchase the qualifying medical expenses and healthcare services they want with their own money.
Employees offered a group coverage HRA—also known as an integrated HRA—can use their allowances to help cover expenses subject to their deductible. Eligible expenses can include everything listed under IRS Publication 502, although you can limit some of these items according to your preference.
For example, if you want to offer a premium-only QSEHRA that only reimburses employees for their individual health insurance premiums, not out-of-pocket costs, you can do so. Keep in mind that if you’re offering an HRA that’s integrated with your group health insurance plan, then employees will only be able to use their allowance for out-of-pocket expenses, not insurance premiums.
Step 3: Employees submit proof of incurred expenses
Next, after employees have made their purchases, they’ll submit documentation showing proof of the incurred expenses they’re submitting for reimbursement.
This documentation must include:
- The name of the item or service
- The cost of the item or service
- The name of the vendor
- The date of purchase
Invoices, receipts, or an explanation of benefits from an insurer or healthcare provider typically satisfies this requirement. Depending on the item that’s being requested for reimbursement, a doctor’s note or prescription may also be necessary. Keep in mind that this information is subject to HIPAA’s privacy rules and must be handled carefully if you are self-administering an HRA.
Step 4: Review and reimburse expenses
Finally, employers will review the expense and either approve or reject the request. If you’re offering an HRA with PeopleKeep, our experts will review your employees’ submissions for you so you can be sure it qualifies. If it’s a qualified expense, you will reimburse your employee up to their accrued allowance.
Typically, employers choose to reimburse employees through payroll by adding a non-taxable line item to employees’ paychecks, although you can also pay out HRA funds through a separate check, cash, or a bank transfer.
What types of HRAs are there?
No matter your organization’s size, budget, or group health insurance status, there’s an HRA that will work for you.
PeopleKeep offers three types of HRAs:
Qualified small employer HRA (QSEHRA)
The qualified small employer HRA (QSEHRA) is made for small businesses with fewer than 50 full-time equivalent employees, and works for all W-2 employees regardless of their insurance status. A QSEHRA can reimburse employees for insurance premiums, out-of-pocket costs, or both.
Individual coverage HRA (ICHRA)
The individual coverage HRA (ICHRA) works for employers of all sizes. Employers may offer an ICHRA as a standalone benefit or as an alternative health benefit to employees who don’t qualify for your current group health insurance plan. An ICHRA can reimburse employees for qualifying individual health insurance premiums, out-of-pocket costs, or both.
The integrated HRA, also known as a group coverage HRA (GCHRA), works as a supplement to group health insurance to cover out-of-pocket expenses that aren’t fully paid for by the group health insurance plan.
Who can offer an HRA?
Because there are HRAs available for employers of all sizes, virtually anyone can offer an HRA!
Here’s a brief look at the requirements for each type of HRA:
- Qualified small employer HRA (QSEHRA): Your organization must have fewer than 50 full-time employees and cannot offer group coverage. A QSEHRA is a great fit for a small business ready to offer their first health benefit or frustrated by annual cost increases and limited employee flexibility with their group plan.
- Individual coverage HRA (ICHRA): Available to organizations of all sizes, an ICHRA is a great choice for employers who want a customizable benefit to offer employees in different classes different benefits. Keep in mind that with an ICHRA, you cannot offer employees in the same class a choice between group coverage and an ICHRA. For employers with employees in many states, an ICHRA is often a great solution.
- Group coverage HRA (GCHRA): Organizations offering a group health insurance plan qualify. Employees must be enrolled in the group health plan in order to participate in this type of HRA. A GCHRA is best for employers who want to level-up their existing group health insurance policy to better recruit and retain top talent.
How do you manage an HRA?
When managing an HRA, you generally have three options: Self-administration, a third-party administrator, or a software solution.
With self-administration, the employer takes on all of the responsibilities of managing their health benefit without any outside help. That means your organization is fully liable for any fines or breaches in compliance with the Internal Revenue Service, HIPAA, ERISA, or other regulatory bodies.
To avoid that risk, many small employers contract with an attorney or hand over their benefit to a third-party administrator (TPA). However, that means giving up control over your benefit to an outside source.
If you’re attracted to the control self-administration gives you but are wary of the compliance concerns, PeopleKeep’s combined software and award-winning customer support solution is a great choice. Our experts generate your legal plan documents, verify employee expenses for approval, and automatically send required notices so you don’t have to.
Here’s the best part—unlike working with a TPA, our software simply acts as a support system for self administrators, so you always maintain ownership of the benefit design and decision-making process.
Comparing health benefits? Download our comparison guide
Can business owners participate in an HRA?
Depending on how they file, some business owners can participate in an HRA.
C-corporation owners: C-corporations are legal entities separate from the owner. This means owners are considered common-law employees of the corporation and are eligible to participate in this benefit. As with all employees, this eligibility extends to the C-corp owner’s family as well. All reimbursements paid to the C-corp owner and the owner’s family are tax-free to the company and the owner.
Sole proprietors: A sole proprietorship is an unincorporated business owned and run by one person. There’s no distinction between the business and owner, so the owner isn't an employee. This means sole proprietors can’t participate.
But, if the owner is married to a W-2 employee of the business, the owner could gain access through their spouse’s allowance as a dependent. All reimbursements would be tax-free to both the sole proprietorship and the owner’s spouse.
Partners: A partnership is a pass-through entity, which means the company isn't subject to income tax. Instead, the partners are directly taxed individually. Partners in a partnership are considered self-employed, rather than employees of the company, so they’re not eligible to participate in a reimbursement benefit.
Similar to sole proprietors, partners can access the benefit if they are married to a W-2 employee of the business, as long as the partner’s spouse isn’t also a business partner.
S-corporation owners: An S-corporation is a pass-through entity, meaning the company isn’t subject to income tax. Instead, shareholders (i.e., owners who own 2 percent or more of the company’s shares) are directly taxed individually. This means shareholders aren’t considered employees and aren’t eligible to participate in a reimbursement benefit.
What expenses are eligible under an HRA?
HRAs can reimburse many healthcare products and services, including insurance premiums, provided they are not already paid with pre-tax dollars. Use our IRS expense tool to see which expenses can be eligible for reimbursement.
Where is the money held for HRAs?
Unlike a health savings account (HSA), an HRA doesn’t require employers to add funds to an account. Employers offering an HRA with PeopleKeep only need to add a line item to employees’ paychecks when reimbursing them for expenses. Any unused funds at the end of the plan year stay with the employer.
What is the difference between an HRA and an HSA?
An HRA is an arrangement between an employer and an employee allowing employees to get reimbursed for their medical expenses, while an HSA is a portable account that the employee owns and keeps with them even after they leave the organization. With an HRA, the employee only gets paid when they incur an eligible expense, while an HSA is pre-funded each month regardless of whether or not they spend the money.
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