Wondering how an HRA is funded? That's an important question. At Take Command, we love the simplicity and flexibility of health reimbursement arrangements (HRAs). They are an expanding, tax-advantaged tool that allows businesses to offer affordable and personalized benefits. Here's how HRAs are funded.
How is an HRA funded?
Unlike some other health care options, an HRA is not a bank account; it’s not a pre-funded pool of money an employee can use at any time or take with them to their next job. In fact, you aren't actually funding anything, only reimbursing when employees submit a receipt. Many people confuse HRAs with Health Reimbursement Accounts but this is a misnomer.
Unlike an health savings account (HSA), the employer owns the HRA. And unlike group plans, employees own the health plan. The employer maintains funding and control over the arrangement, and if employees never make claims or don’t use the full amount, the employer keeps the money!
That setup means that the employer has:
- Greater budget control. You set the allowable reimbursement rates and the ceiling will never be greater than that.
- No participation concerns. If employees decide not to use the benefit, there is no cost or concern for the plan.
- More flexibility. You can vary rates by family size or age, or you can scale reimbursement rates based on employee class. You can also make changes to your reimbursement rates and design year over year.
So how does HRA funding work?
As a savvy business owner, your goal is to get as much of your and your employees’ medical expenses counted as a business expense as legally possible, as our handy guide demonstrates.
HRAs aim to help employees pay for benefits tax-free; guard against reimbursements being used for things like executive compensation, fraud, discrimination, etc; and help employers comply with the Affordable Care Act.
Employees can’t withdraw funds in advance and then pay for their medical expenses (though if an employer chooses, they could provide an HRA debit card, which could allow for reimbursement at the time of service).
If an employee uses their allocated funds before the end of their coverage year, they will have to cover any additional bills out of pocket, or through some additional arrangement like a flexible savings account (FSA) or health savings account (HSA).
Unlike other setups, the HRA is also solely employer-funded; an employee cannot contribute to the fund. This means that an employee doesn’t have to worry about the tax concerns of a health savings account.
New options
You may have heard us at Take Command singing the praises of new types of HRAs, known as individual coverage HRA (ICHRA) and qualified small employer HRA (QSEHRA).
Employees can use these HRAs to buy their own insurance with pretax dollars on or off the Affordable Care Act exchange, and may get reimbursed for qualified health expenses.
Under these new rules, employers that continue offering traditional group health insurance now can offer excepted benefit HRAs to reimburse employees up to a certain amount in qualified medical expenses.
There’s also no limit to how much an employer can allocate for reimbursement in an ICHRA.
Need help?
If you’re looking for more information, check out our frequently updated Frequently Asked Questions (FAQ) database on ICHRA.
Is there a question we haven't answered? Please reach out and let us know.
