What is a health reimbursement arrangement?
A health reimbursement arrangement is a tax-advantaged benefits solution that allows employers to reimburse their employees for qualified health costs or individual insurance premiums. It's also commonly called HRA health plans, health reimbursement accounts, HRA insurance, HRA healthcare, or HRA health insurance. Don't sweat it! We're talking about the same thing.
Traditional group health insurance plans are complex, overpriced, and rigid. Not to mention, it's challenging to find the right plan that fits all of your employee's health care needs. For many employers, a Health Reimbursement Arrangement (HRA) is an excellent alternative to group plans.
Note: This HRA Guide was originally published in 2022 and has been updated for 2024.
What does HRA stand for?
An HRA stands for Health Reimbursement Arrangement.
HRAs, sometimes referred to as Health Reimbursement Accounts or HRA health plans, give power back to the employee by allowing them to make healthcare decisions right for them. Plus, it alleviates the hassle for the employer to administer a group plan. HRAs are game-changers in the employer health benefits world.
HRAs Features
Health reimbursement accounts are appealing to both employers and employees for many reasons. Here are a few of the advantages HRAs have compared to traditional group insurance:
- Employee Choice. Employees get to choose an individual insurance plan that meets their needs. They may also be reimbursed for out-of-pocket health care expenses.
- No Pre-Funding Accounts. No more upfront costs. With an HRA, the employer sets the allowance, and reimbursement payments aren't made until qualified claims are approved.
- Fixed Dollar Amounts. No annual premium raises on group insurance plans.
- No Participation Requirements. If employees decide not to use the benefit, it doesn't impact the HRA plan.
- Tax Advantages. Employees get reimbursements tax-free. Employers can deduct the reimbursements from taxes. Plus, there is no payroll tax on the amount.
What to expect with an HRA
HRAs are a popular alternative to traditional group health insurance. Your HRA gives you the freedom and flexibility you want to escape from the confines of group plans. With an HRA, you can expect:
- No more pricey renewals
- No more paying for things your employees don’t want or use
- No more group participation requirements
- No more taking on risk
Instead, you get the benefits of reimbursing your employees for health insurance, such as:
- Tax efficiency
- Flexible design
- Budget control
- Optimized benefits
- You can get out of the health insurance risk management game
Types of HRAs (Health Reimbursement Accounts)
There are several types of health reimbursement accounts for employers to consider in 2024. Take Command specializes in the two most common arrangements: ICHRA and QSEHRA.
A practical handbook for employers, brokers, and benefits professionals regarding the new Individual Coverage HRA
QSEHRA Guide
This guide is designed to help small employers unlock the huge savings potential of QSEHRA.
HRA Pros and Cons
Think about HRA pros and cons before you make a decision for your business.
HRA Pros:
- More control over costs: Employers can take charge of their own benefits budgets each year instead of being subject to yearly group increases.
- Greater plan flexibility: Employers can create a customized plan that works for the team instead of being forced to choose between whichever plans insurance companies offer.
- Greater network flexibility and personalization: Employees can select the individual plans and doctors that work best for them and can use HRAs for medical and dental expenses, prescriptions, annual exams, birth control medications, and more.Some HRA designs (including all of Take Command’s products) allow employees to use their HRA for insurance premiums
- Risk de-management: Employers no longer need to worry about factoring managing employees’ health risks into the business strategy.
- Plan portability: Employees can keep their individual health insurance plan and don’t have to lose health coverage tied to a specific job.
- Unused funds can roll over at the employer's discretion.
- Tax-advantaged funds for medical expenses
- Some types of HRAs prompt a Special Enrollment Period, meaning it’s easier for employees to sign up for health insurance within 60 days of that change.
HRA Cons:
- Funds stay with the employer if an employee leaves the company. Note: this is actually a pro for employers.
- Employees cannot use it for cosmetic costs such as teeth whitening or other procedures or products deemed unnecessary. Again, this would be considered a pro by most employers.
- There may be plan-based employer contribution limits depending on what type of HRA is offered
- Provider options may be limited based on the insurance market per geographical region.
- In some cases, employees on spouse’s plans cannot get reimbursed for their spouse’s premiums.
- For some types of HRAs, the HRA offer can replace premium tax credits that some individuals receive.
- Some HRAs don’t integrate with medical sharing plans or TRICARE, among others.
HRA History
Let's talk a bit about how HRAs came to be.
Health Reimbursement Arrangements were commonly used before the Affordable Care Act was passed in 2010. The complexity of the bill and its regulations essentially brought an end to reimbursements by employers.
Then in 2016, the 21st Century Cures Act was passed and created the QSEHRA giving small businesses the ability to reimburse for individual insurance or out-of-pocket health care expenses. The creation of the QSEHRA gave small businesses a tax-savvy way to offer health benefits to their employees. This is important because small businesses or organizations may not have the buying power for a larger group health insurance plan.
Then, in 2019, new regulations came down from the U.S. government to expand HRAs. The ICHRA was born, allowing employers of any size to offer health reimbursement arrangements. ICHRA became available to employers on January 1, 2020.
With the inception of ICHRA, employers are able to offer an affordable health care solution to their employees and give their employees the chance to choose the coverage that is best for them.
How does an HRA plan work?
How HRAs work is super simple.
The employee pays for health care expenses or individual health insurance premiums, and the employer reimburses them. In order to reimburse employees for health insurance tax-free, a health reimbursement arrangement must be established. The simplicity of this arrangement allows the employee to take control of their healthcare costs by choosing where to spend their dollars and price shopping around to find the best value for the healthcare they need. It also allows the employer to offer healthcare benefits that best fit their employee's needs and the company's budget.
Steps for health insurance reimbursement to employees
As the name implies, HRAs like ICHRA and QSEHRA are based on reimbursing employees for insurance rather than buying it for them. At a high-level, the way HRAs work is very simple:
- Design: Employers design their plan, including establishing reimbursement limits and defining which employees are eligible. For ICHRA specifically, employees can be divided by classes (full time, seasonal, part time, salaried vs. non-salaried, etc. and each class can be extended a different level of benefit—varying reimbursement amounts or even in combination with a group plan. For QSEHRA, you can only vary based on age or family size.
- Choose: Employees purchase the individual plans they want.
- Submit Proof of Coverage: Employees submit claims for reimbursement (can be as easy as snapping a picture of a receipt).
- Reimburse: Employers reimburse employees for valid claims.
Are health reimbursement accounts considered income?
As we mentioned, the reimbursements made to the employees are tax-free. This is because the IRS doesn't consider these reimbursements income. Employer-issued reimbursements are also exempt from federal income and payroll taxes.
Are HRAs the same as health insurance?
No, an HRA health reimbursement arrangement doesn't act the same as health insurance. For most HRAs, the employee is required to have health insurance from the individual marketplace or sometimes, a spousal or parents' employer's insurance. The HRA may reimburse the employee for their health insurance premiums.
How are HRA funds used?
You’re probably asking yourself, what are qualified medical expenses? The IRS Publication 502 outlines qualified medical expenses; however, the employer may decide to reimburse only for health insurance premiums, or for qualified medical expenses in addition to health insurance premiums. Slightly more than half of our clients choose to reimburse for both.
What is HRA insurance?
HRA insurance refers to the types of plans that can be integrated with each type of HRA. At a high level, this means ACA-compliant, high quality health plans. The easy way to see if they will be compliant is if they have a metal tier associated with the name.
Can I withdraw money from my HRA account?
Employees cannot withdraw from their accounts, but very often, unused funds can be applied to future healthcare expenses, typically within the same calendar year. Becoming familiar with HRA rules for employees—especially ICHRA and QSEHRA, the Qualified Small Employer Health Reimbursement Arrangement—is critical for those offering HRAs. This can help ensure you provide the right tools and information to your employees.
Gym memberships, cosmetic procedures, supplements, and vitamins do not qualify, but any out-of-pocket costs that count toward a deductible, like copays, tests, and prescription costs, are reimbursable as well as helpful things like therapy, chiropractic care, eyeglasses, and contacts, over the counter drugs, and feminine hygiene products.
What is the difference between HRAs vs HSAs?
When considering reimbursement accounts, it’s important to understand HRA vs. HSA. Health reimbursement accounts (HRAs) are funded by employers. Health savings accounts (HSAs), on the other hand, are owned by employees and can receive contributions from both employees and employers based on certain amounts set by the IRS.
HRAs are often confused with HSAs. It's easy to see how. They have similar acronyms and they are both intended to help with healthcare costs. However, these two function very differently.
HRAs, as mentioned earlier, are sometimes referred to as Health Reimbursement Accounts. But they don't have an account for employees to make withdrawals or deposits. It's a reimbursement arrangement between the employer and employee.
HSAs are Health Savings Accounts, similar to a personal savings account, but the money here is used solely for healthcare costs. The account is owned by the individual employee and they can deposit funds or withdraw funds for health-related expenses.
HRAs should not be confused with HSAs. Knowing the difference between a health reimbursement account vs HSA can put you in a better position to offer the best insurance plans to your employees. But can I have an HRA and HSA, and is HRA or HSA better for pregnancy? What about a major surgery? Considering that the two are completely separate accounts, you can have both HRA and HSA plans at once.
Figuring out how to stack HRA and HSA benefits and get the most out of them requires a little context and a lot of explanation. In a nutshell, in order to keep the IRS happy, you can use HSA funds at any time to cover medical expenses as long as you don't submit those same expenses for reimbursement from your employer's HRA. You can contribute to your HSA and use the funds alongside your HRA if you have a high deductible health plan and if your HRA reimburses premiums only.
What are the benefits of HRAs?
HRAs like ICHRA and QSERA are changing the game of employer-sponsored healthcare benefits. These arrangements encourage consumer-driven healthcare meaning the employee is in the driver's seat.
Are HRAs good for employers?
For employers, HRAs can be a great alternative to traditional group benefits. So great, they have us saying no more!
- No more pricey renewals.
- No more paying for things your employees don’t want or use.
- No more group participation requirements.
- No more taking on risk.
What is proof of coverage for an HRA?
Proof of coverage ensures that each employee getting reimbursed for medical premiums has high quality, ACA compliant health insurance. It's a critical step in our set up process. To receive reimbursements through the HRA, employees must submit documentation like a monthly bill, an email confirmation, or an ID card.
Do employees have to show proof of coverage every month?
Thankfully, no. Take Command sets up a recurring premium that automates this process. Reports are then sent to employers monthly.
What happens if employees submitted a receipt that's above their monthly allowance?
If an employee submits a receipt that is more than their monthly HRA allowance, it will be reimbursed throughout the year.
What happens to leftover HRA funds?
HRA funds do not rollover unless specified by the employer.
What happens to HRA funds if an employee leaves or is terminated?
If an employee leaves the company, HRA funds stay with the employer, but the employee's health plan will stay with the employee, helping them avoid costly COBRA or lapses in coverage.
Can an employee's spouse's group insurance be reimbursed?
It depends on the type of HRA. With ICHRA, the rules do not allow for employees to consider getting on their spouse’s group plan (if offered by the spouse’s employer). However, a QSEHRA works great with employees on their spouse’s group plan.
Can you have HRAs and premium tax credits?
An HRA will offset your tax credits dollar for dollar if you have a QSEHRA. With an ICHRA, it comes down to the affordability of the HRA. If it's considered affordable, employees take the HRA. If it's above the affordability threshold, employees can choose what's best for them.
Who funds an HRA?
HRAs are solely funded by employers. Employees cannot add funds.
Are HRA accounts pre-funded?
The great thing about HRA accounts is that they are not actually pre-funded. Since it's a reimbursement arrangement, it means that once a qualified expense has been incurred, the employer reimburses the employee.
Is a health reimbursement arrangement worth it?
HRA plans are an excellent route for employee health coverage. There are many advantages to health reimbursement arrangements for both the employer and the employee.
Here are some advantages for the employer when considering an HRA:
- Health reimbursement arrangements are competitive employee benefits offerings desirable for employees when being hired
- HRAs are an effective retention strategy for employees because of the flexibility they offer for insurance coverage
- There are no participation requirements for offering coverage
- There are no annual premium raises with an HRA
- HRAs can be used to reimburse dental premiums
Alternatively, here are some advantages of HRAs for your employees:
- HRAs allow the employee to choose from multiple insurances plans
- Employees get reimbursements for health insurance premiums and cost tax-free
- Health insurance is portable because it’s only reimbursed by the employer, not completely paid for by the employer
- HRAs improve employee retention and provide competitive benefits that are flexible for each of your employees.
Connect with our team of experts to discuss why offering an HRA is worth it for your company.
What are reimbursement benefits?
Businesses offering reimbursement plans will reimburse employees for the health insurance premiums, and often they’ll allow qualified medical expenses to be reimbursed as well.
Medical expenses like these often include:
- Doctor visits
- Copays
- Routine dental cleanings
- Eye-glasses
- Prescriptions
Employers can decide if they want to reimburse for insurance premiums only, or if they want to reimburse for premiums and medical expenses.
Insurance premium reimbursement can also include eligible dental or vision premiums depending on the qualified health plan.
Here’s a deeper look into more qualified medical expenses that are reimbursable through your HRA.
How do I claim reimbursement?
HRA administrators like ours make it easy for employees to submit for health insurance reimbursement.
Once the employer chooses which HRA plan works best for them, they’ll set a budget and then let employees know they can use their HRA. The employees can then pay for their own health insurance premiums and medical expenses. After payments, employees submit their receipts for reimbursement from the plan.
Employees simply can take a photo of their receipts, and then send it to their HRA plan for reimbursement. Our HRA administrators at Take Command provide a customized portal for the employer and employees to make submitting and reviewing reimbursements seamless.
Are HRAs good for employees?
For employees, HRA health reimbursement arrangements offer flexibility to choose healthcare coverage that fits their individual needs. They allow employees to drive the decisions.
Here are the other health reimbursement arrangement benefits for employees.
- Choice: Employees are able to visit their preferred provider or choose the healthcare plan they want.
- Keep Your Plan: If the employee switches jobs, they get to keep their health insurance plan.
- Customer Service: When individuals buy insurance, many times they get a better customer experience. Some insurance companies have special apps and services that many times aren’t part of the group insurance experience.
- Tax Advantage: Reimbursements are not income and aren’t subject to taxes.
10 ICHRA rules to remember
Before setting up an ICHRA, make sure you understand the important ICHRA rules to stay compliant.
QSEHRA Rules
Before offering a Qualified Small Employer HRA, educate yourself on the QSEHRA rules to stay compliant and keep the IRS happy.
Buy MEC for QSEHRA Plan
For an employee to participate in a Qualified Small Employer HRA, they need to have an individual health plan that meets Minimum Essential Coverage. Here's an article that goes through the options.
ICHRA Affordability
To calculate affordability, we need to look at the lowest-cost silver plan on the marketplace exchange. An affordable HRA contribution must be greater than that silver plan minus 9.83% times the employee’s household income.
Clear as mud, right? To learn more about affordability, visit our affordability calculator.
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QSEHRA Affordability
Since QSEHRAs are only available for employers with less than 50 full-time employees, it doesn’t fall under the affordability guidelines by the healthcare mandate. But as we mentioned, it’s important to understand affordability as it impacts employees ability to qualify for the premium tax credit.
HRA Administration
An HRA administrator assists with the design and management of the arrangement. It’s necessary to have a third-party administrator for several reasons, the biggest being privacy.
What is an HRA administrator?
Since an HRA health reimbursement arrangement is reimbursing medical expenses to substantiate their claim, it needs to be validated with receipts. Under the Health Insurance Portability and Accountability Act (HIPAA), employees' medical expenses including individual health insurance premiums are considered Protected Health Information (PHI). An administrator can provide compliant administration of an HRA. In addition to HIPPA compliance, an administrator can ensure compliance with the IRA. Since HRAs are considered a tax advantage, the IRS requires businesses to keep records for up to seven years.
84% of Take Command's clients spend less than an hour per month administering their HRA.
HRA plan administration in four simple steps.
- The employer designs their HRA plan. Pro tip – it’s even easier when you work with an experienced partner like Take Command.
- Employees purchase their preferred health insurance plan. Take Command even helps them do it and makes it super easy with tons of employee resources, including our window shopping tool.
- After employees purchase their plans of choice, they can then submit eligible reimbursement claims to the employer.
- Finally, the employer reimburses employees for all valid reimbursement claims.
This is a general set of steps that outlines the basic process of an HRA plan. For a more detailed explanation, check out our HRA benefits guide. The specifics of your plan set up will depend on which HRA you choose – QSEHRA or ICHRA. But one thing remains the same, the experts at Take Command are ready to help you at every step.
How to choose an HRA administrator
Choosing an HRA administrator is an important decision. As mentioned above, employers need to ensure they are compliant with their HRA. A good administrator needs to ensure compliance and reporting.
1. Process, Compliance, and Reporting
- Legal Plan Documentation and Plan Summaries
- Employee MEC Verification
- Tax Reporting
- IRS Deadlines
- Year-end W2 Reporting
Form 720 (PCORTF) - COBRA Administration (if not exempt)
- ERISA
- HIPAA and PHI Compliance
- Process to substantiate employee claims
- Reimbursement mechanism
2. Employee Communication
Like any healthcare coverage change, it’s important to effectively communicate with your employees. When considering an administrator, take into account their change management plan.
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Provide communication materials for employees and robust onboarding process
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Employee support while shopping individual health insurance plan
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Easy to use platform to request reimbursements
3. Employer Support
Compliance and legalese aren’t the only things employers need support. The employer needs a quick, easy signup process and a dashboard to view updates and information on the HRAs.
Is an HRA a good idea for my business?
HRAs can have a positive impact on your business. Here are a few questions to consider.
- Are you facing a large renewal fee on group insurance? This is a big one for employers. The cost of group insurance keeps going up. To help control costs and ensure your employees aren’t paying things they don’t need, HRAs are a great alternative to traditional group health insurance.
- Are you hoping to help your employees (even if you don’t have to)? The job market is competitive and offering benefits can be a great recruitment and retention tool. Plus, we know employers want to help their employees. HRAs provide employers with the option to provide a health benefit without breaking the bank.
- How are individual insurance rates in your area? Understanding the individual insurance market in your areas is important. If the rates are not great, employees are going to have few choices for insurance coverage.
- How will you manage the switch? Whether you’re switching from a group insurance or offering a new health benefit, it’s important to have a plan in place to manage the change. Make sure you understand the fine print and communicate to employees.
How to set up an HRA
Ready to get started with an HRA? Setting up an HRA is easy, especially if you have a skilled administrator like Take Command. Now, that you have read through the basics of HRAs, here are the basic steps for setting it up.
1. Pick an HRA Type
An employer will choose a plan that best fits the organization depending on several factors. For example, a QSEHRA is only available for employers with less than 50 full-time employees. An ICHRA can scale for any size of employer.
2. Select a Start Date
Once an employer decides to offer an HRA, they just need to pick a start date. They don’t have to be tired to open enrollment. The implementation triggers a special enrollment period so employees can find plans on the individual market outside of open enrollment dates.
3. Design the Plan
To design the HRA plan, the employer will need to determine eligible employees. For an ICHRA, the employer will need to set up classes based on employee types like employment status or geography. Then the employer will determine the allowance for each class. For both ICHRA and QSEHRA, allowances may also be based on age or the number of dependents.
4. Draft Legal Documents
Like any benefits offering, there needs to be an established legal plan that includes formal plans and a summary plan description that includes HRA policies, reimbursement amounts, and structure. This is important since failure to comply with the IRS and Department of Labor rules will result in hefty penalties.
5. Educate Employees
Employees must know how to use the HRA. From the reimbursement process to how premium tax credits work with the HRA, there is a lot of ground to cover. Educating the employees on how it works can be a daunting process, but with Take Command, we help with the ins and outs of the new HRA.
6. Assist with Getting Insurance
Since employees will likely be getting individual insurance from the marketplace, it’s important to offer support in this arena. While federal rules prohibit employers from being involved in the actual decisions-making for provider or policy, the employer can provide additional decision-making tools and information through the complicated process.
