Health Reimbursement Arrangement (HRA)

An alternative to group health insurance

What is a health reimbursement arrangement (HRA)?

A health reimbursement arrangement (HRA) is an IRS-approved, employer-funded, health benefit used to reimburse employees for out-of-pocket medical expenses and personal health insurance premiums.

Many small- to medium-sized businesses use HRAs over group health insurance or health stipends because of the tax advantages and budget control.

How does it work?

With an HRA, businesses set a monthly allowance for employees. After making health care purchases, most often insurance premiums, employees submit documentation to the business's HRA administrator. From there, the administrator reviews the documents and, if everything is in order, reimburses employees up to their monthly allowance amount, tax-free.

The problem with group health insurance

HRAs are a new way to offer health benefits to employees. Before, most small businesses were unable to offer traditional group benefits because they’re too expensive, too complicated, and too one-size-fits-all.

Most people believe health benefits are the services a company offers, such as a health insurance plan or 401(k). With an HRA, it’s the opposite. Companies give employees tax-free money to spend on the consumer services they find most valuable. It’s as simple as wages.

With an HRA, companies set a monthly benefit allowance, and employees buy what fits their personal needs. This saves companies and employees an average of 35 percent in taxes compared with wages while avoiding the pains of offering traditional group benefits.

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Types of HRAs in 2020

HRA steps, health reimbursement arrangement

Qualified Small Employer HRA (QSEHRA)

The QSEHRA is available to businesses with fewer than 50 employees that do not offer a group health insurance policy. With a QSEHRA, businesses can offer allowances up to $5,250 for single employees and $10,600 for employees with a family in 2020. Allowance amounts must be the same among all employees, though some differences may be allowed according to the employees’ age and family size.

HRA steps, health reimbursement arrangement

Individual Coverage HRA (ICHRA)

The ICHRA is available to businesses of all sizes and functions much like the QSEHRA, though with fewer restrictions. With the ICHRA, there are no allowance caps, and businesses can offer different amounts to different employees based on 11 employee classes. It is only available to employees covered by their own individual health insurance policy.

HRA steps, health reimbursement arrangement

Group Coverage HRA

The group coverage HRA is a reimbursement benefit available to businesses that already offer a group health insurance policy. In this benefit, only employees covered by the company's existing group policy are eligible for the HRA.

HRA steps, health reimbursement arrangement

Excepted Benefit HRA

The excepted benefit HRA is similar to a group coverage HRA in that it allows employers to reimburse employees participating in the company's group health insurance policy. The excepted benefit HRA is capped at $1,800 per year per employee for 2020.

HRA steps, health reimbursement arrangement

Dental/Vision HRA

The dental/vision HRA is much like the other HRAs, however, it is restricted to allow employers to make reimbursements only for dental- or vision-related expenses incurred by employees. Many employers choose to offer this in addition to their existing group health insurance policy. 

HRA steps, health reimbursement arrangement

Retiree HRA

The retiree HRA functions much like the QSEHRA, except it is restricted to retired employees of a company. With this HRA, retired employees may be reimbursed, tax-free, for out-of-pocket medical expenses that are not otherwise covered by their own individual health insurance policy.

HRA comparison chart

Feature

QSEHRA

ICHRA

Group Coverage HRA

Business size restrictions

Limited to businesses with fewer than 50 FTE employees

None

None

Allowance amount restrictions

Limited to $5,150 for self-only employees and $10,450 for employees with a family in 2019. Businesses cannot give different employees different allowance amounts based on criteria other than family status.

None

No minimum or maximum contribution requirements. Businesses can give different employees different allowance amounts based on job-based criteria.

Group health policy requirements

Can’t be offered with a group health policy

Can be offered with a group health policy, but employees cannot have a choice between the group policy and the HRA.

Must be offered with a group health policy

Individual health policies permitted

Yes

Yes; in fact, they're required for participation in the HRA.

No

Premium tax credit coordination requirements

Employees must reduce their premium tax credit by the amount of their HRA allowance.

Employees cannot collect premium tax credits and participate in the ICHRA. However, if the ICHRA allowance is considered unaffordable, employees may waive the HRA and collect the credits.

N/A. These HRAs can’t reimburse employees for individual premiums.

Annual rollover permitted

Yes

Yes

Yes

Medical expenses available for reimbursement

Any or all items listed in IRS Publication 502

Any or all items listed in IRS Publication 502

Any or all items listed in IRS Publication 502 with the exception of individual insurance premiums

Employee eligibility guidelines

All full-time employees are eligible. Businesses can decide on part-time employee eligibility.

Businesses can decide on eligibility based on 11 different employee classes.

None

How does an HRA work?

There are four main steps that employers and employees use to submit and reimburse expenses. They are:

allowance, HRA, health reimbursement arrangement

Businesses set an allowance

The business first decides how much tax-free money it will offer employees every month. This represents the maximum amount businesses will reimburse the employee for health care. Once an allowance is set, it is impossible to go over budget.

make a purchase, HRA, health reimbursement arrangement

Employees purchase health care

Employees choose the health care products and services they want and purchase them with their own money. You can find a full list of eligible expenses in IRS Publication 502, though the business is allowed to limit these items according to their preference.

submit expenses, HRA, health reimbursement arrangement

Employees submit proof of expense

To receive reimbursement, employees must submit proof that they incurred an eligible expense. Typically, this takes the form of a receipt, and in some cases, includes a doctor's note. In order to remain HIPAA compliant, many employers choose to use an HRA administration software.

reimbursement, HRA, health reimbursement arrangement

Documents are reviewed

To be approved, employees’ documentation must show the service or product purchased, the amount incurred, and the date of the service or sale. If these three items are in place and the expense is eligible for reimbursement, the business approves the expense and reimburses the employee up to their allowance amount.

Which businesses can offer an HRA?

Each HRA comes with different business eligibility guidelines.

  • QSEHRA: Businesses must have fewer than 50 full-time employees and cannot offer group health insurance.
  • ICHRA: Available to any business, though businesses cannot also offer an excepted benefit HRA. They also cannot offer employees in the same class a choice between group coverage and the ICHRA.
  • Group coverage HRA: Businesses must offer a group health insurance policy.
  • Excepted benefit HRA: Businesses must offer a group health insurance policy and cannot also offer an ICHRA.
  • Dental/Vision HRA: Available to any business.
  • Retiree HRA: Available to any business.

Generally, all businesses can offer at least one type of HRA to at least some employees.

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How to set up an HRA

To start offering an HRA, businesses must follow a seven-step process:

  1. Set HRA rules. These rules include employee eligibility requirements, any employee classes to be used, and which expenses will be eligible for reimbursement.
  2. Choose a start date. This is the date the HRA will begin. Though some businesses choose a start date to coincide with the calendar year, HRAs can begin at any time.
  3. If necessary, cancel the business’s group policy or remove necessary employees. If offering the QSEHRA, businesses must cancel any existing group policy first. With the ICHRA, businesses must ensure employees receiving the ICHRA are no longer eligible for a group policy.
  4. Determine a budget and set allowances. With most HRAs, the business can offer unlimited allowance amounts. With the QSEHRA, though, the business is limited to $437.50 per month for single employees and $883.83 for employees with a family in 2020. With the excepted benefit HRA, the business is limited to $1,800 per year per employee.
  5. Create and distribute plan documents. The business must establish legal plan documents and make them available to employees. This includes a summary plan description (SPD).
  6. Communicate the new HRA to employees. Businesses should communicate clearly and effectively with employees about how the new HRA works. In some cases, as with the QSEHRA, this communication is required by law.
  7. If necessary, provide resources to help employees purchase individual insurance. For HRAs that support individual coverage, such as the ICHRA and the QSEHRA, businesses should give employees resources for comparing and purchasing personal policies.

How to manage an HRA

Businesses offering an HRA must manage and administer the HRA compliantly. To do this, they must:

  • Keep the benefit up to date. Employees come and go, and the business may choose to make changes to expense eligibility or employee class structure. These items need to be updated as they occur throughout the life of the benefit.
  • Process reimbursements and store documents. The business must process and pay reimbursements as they come in. The IRS and Department of Labor also require proper storage of these documents.
  • Track regulatory changes and update plan documents. Whenever regulations regarding HRAs change, the business must update plan documents and send timely notice to its employees.

To accomplish these items, businesses offering an HRA are always better off using an HRA administrator. Without one, it's easy to run into compliance trouble and HIPAA privacy violations—particularly with more complex HRAs, like the QSEHRA or the ICHRA.

With HRA administration software, businesses can change plan benefits at any time or even cancel the plan completely. In fact, HRA administrators like PeopleKeep make real-time monitoring of HRA liabilities, reimbursements, and utilization easy. The typical PeopleKeep customer spends just 10 minutes a month administering the HRA.

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FAQs about the HRA

Here are additional questions business owners often ask about HRAs.

What expenses can be reimbursed with an HRA?

The list of expenses that can be reimbursed with an HRA depends on the type of HRA you’re using. In general, though, there are two kinds of expenses employees and their families can have reimbursed:

  • Insurance premiums

  • Medical expenses

The type of insurance premiums that can be reimbursed depends on the type of HRA. With the QSEHRA, the ICHRA, the one-person stand-alone HRA, and the retiree HRA, all individual insurance premiums—including health, dental, and vision—can be reimbursed. With the group coverage and excepted benefit HRAs, individual health insurance premiums cannot be reimbursed.

A full list of HRA-eligible medical expenses can be found in IRS Publication 502. Businesses can choose to reimburse all of these items, or they can limit the list.

Potential reimbursable medical expenses include:

  • Copays

  • Deductibles

  • Prescription drugs

  • Nonprescription drugs (with a doctor’s note)

  • Mileage to and from medical appointments

  • Eyeglasses

  • Bandages

  • Wheelchairs

  • X-rays


Can business owners participate in the HRA?

Depending on the HRA and the business’s corporate filing status, business owners may be able to participate in the HRA benefit.

Generally, if the business owner is considered a W-2 employee and meets other HRA requirements, he or she can participate.


Can HRAs be used with health savings accounts (HSAs)?

Employees with HRAs can also use HSAs. However, the HRA must coordinate with the HSA.

HSAs require that account holders receive no coverage before they meet the HSA’s annual deductible except for five exempted categories of expenses. When employees with an HRA are planning to make or receive HSA contributions, they can only use their HRA to reimburse these expenses.

They are:

  • Health insurance premiums

  • Wellness or preventive care (e.g., checkups, mammograms, smoking cessation, weight loss)

  • Dental expenses

  • Vision expenses

  • Long-term-care premiums

These adjustments are necessary for the individual employee and affected family members only.


How can HRAs help businesses hire and keep their employees?

One of the primary reasons businesses offer HRAs is because the benefit helps them hire and keep talented employees.

With an HRA, businesses can offer a more flexible benefit than they could with group health insurance. Depending on the HRA, they can offer unlimited amounts of money and potentially even vary that offering according to job-based criteria.

HRAs also deliver value beyond basic insurance coverage. While HRAs are largely used to facilitate employee choice in health insurance, they can also reimburse significant expenses like prescription drugs, copayments, and amounts put toward deductibles.

Finally, many HRAs provide value for all employees—not just those without access to any other health insurance. Unlike group health insurance, some HRAs can benefit employees on spouse’s plans or those using alternative coverage like health care sharing ministries.

With these features, businesses can better tailor HRA benefits to existing and potential employees, helping them achieve their personnel goals and grow their companies.


Where did HRAs come from?

Though they’ve evolved many times, HRAs aren’t new.

When the price of group health insurance began to rise in the 1960s, businesses and lawmakers began experimenting with innovations to ease the pressure. In 1974, Congress introduced HRAs through the Employee Retirement Income Security Act (ERISA).

The first HRA was the group-coverage HRA. With a group-coverage HRA, businesses could offer both a group health insurance policy and an HRA. Many businesses used the HRA to ease the pain of choosing a lower-cost, high-deductible group policy; they gave employees allowance amounts equal to the deductible or reimbursed employees for items not covered under the group policy.

In the early 2000s, HRAs evolved to become a stand-alone benefit. At their height, stand-alone HRAs could be integrated with both group and individual coverage and businesses could offer unlimited allowance amounts. Businesses could also offer different allowance amounts to different employees dependent on job-based criteria, like an employee’s title.

HRAs were significantly limited by IRS interpretation of the Affordable Care Act in 2013. Following the release of IRS Notice 2013-54, only three HRAs were available: the group-coverage HRA, a stand-alone HRA set up for one person, and an HRA set up for retirees.

In 2016, Congress created a new HRA with the passage of the 21st Century Cures Act: the qualified small employer HRA (QSEHRA). With the QSEHRA, small businesses with fewer than 50 employees could offer an HRA governed by new rules specified in the legislation.

HRAs continue to expand and, in 2020, two new HRAs are available: the individual-coverage HRA (ICHRA) and the excepted benefit HRA. These HRAs are available to businesses of all sizes, and in some ways more closely resemble the stand-alone HRAs of the past.

Timeline of the HRA's history

1950s

1954: Section 105 was added to the Internal Revenue Code (IRC). IRC Section 105 allows an employer to offer a plan to reimburse employees' qualified medical expenses, including insurance premiums. Under section 105, amounts received are excluded from employees' income.

1960s

1961: Revenue Ruling 61-146 was issued allowing an employer to pay for or reimburse an employee’s medical expenses tax-free, under IRC Section 106. Revenue Ruling 61-146 set the stage for Employer Payment Plans, where an employer pays directly or reimburses directly for health insurance premiums.

1970s

1974: ERISA was established. ERISA implemented fair and equal treatment requirements for employee benefit plans, including the requirement for formal plan documents. Today, all formal health insurance reimbursement plans must comply with ERISA laws.

1990s

1996: HIPAA Privacy Law was established. HIPAA protects employees’ medically private health information. Today, all formal health insurance reimbursement plans must comply with HIPAA privacy rules.

2000s

2002: The IRS issued Notice 2002-45 which confirmed an employer can offer a plan to reimburse employees’ qualified medical expenses, including insurance premiums. The Notice provided rules and guidance for Health Reimbursement Arrangements (HRAs) including the tax treatment, benefits, and coverage under an HRA.

2010s

2010: The ACA was signed into law. Among other things, the ACA requires group health plans (including health insurance reimbursement plans) to comply with new requirements effective 2014.

2013: The IRS released IRS Notice 2013-54, which limited compliant HRAs to the group-coverage HRA, the one-person stand-alone HRA, and the retiree HRA.

2016: Congress passed the 21st Century Cures Act, which created the qualified small employer HRA (QSEHRA) for small businesses with fewer than 50 employees.

2018: The Health Reimbursement Arrangements and Other Account-Based Group Health Plans (REG-136724-17) proposed the creation of the individual-coverage HRA (ICHRA) and the excepted-benefit HRA.

2020s

2020: The ICHRA and excepted benefit HRA become available and compliant.

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