Types of HRA Plans: Differences, Similarities & What's Right for You

Health Reimbursement Arrangements (HRAs) have become a pivotal element in employee benefits, providing versatile healthcare funding solutions for businesses. As a business owner or HR decision-maker, understanding the nuances of different HRA plans is crucial for tailoring benefits to your organization's unique needs. 

Types of HRAs

Navigating the world of HRAs can be complex, but with this guide, you'll be equipped to make informed decisions about offering the right health benefits to your team.

What is an HRA?

Health Reimbursement Arrangements (HRAs) are a cornerstone of modern employee benefits, offering a flexible approach to healthcare financing. Unlike traditional health insurance plans, HRAs empower employers to provide their employees with funds for medical expenses, offering both flexibility and control over healthcare spending. This adaptability makes HRAs an attractive option for businesses seeking to tailor their health benefits to specific needs.

Understanding the differences and similarities among various HRAs is critical. Each type of HRA comes with its own set of rules, benefits, and limitations, making some more suitable for certain businesses than others. By grasping these distinctions, employers can effectively navigate the landscape of employee health benefits, ensuring they choose the most appropriate HRA model for their organization and workforce.

How Do HRAs Work?

An HRA is an employer-funded plan that reimburses employees for qualified medical expenses, up to a certain amount annually. This arrangement offers tax advantages to both employers and employees. Employers fund and own the accounts, and reimbursement for medical expenses is tax-free for employees, provided the expenses are qualified. 

Employers set the terms of the HRA, including the amount of funds available and the type of expenses that are eligible for reimbursement. Unlike Health Savings Accounts (HSAs), HRAs are not owned by the employee and typically do not carry over unused funds year to year, although some HRA plans may allow this. Also unlike an HSA, HRAs are not pre-funded. There's not "account," there's simply reimbursements. 

The flexibility of HRAs means they can be adapted to a wide range of business sizes and types, making them a versatile tool in crafting a comprehensive employee benefits package.

Individual Coverage HRA (ICHRA)

The Individual Coverage Health Reimbursement Arrangement (ICHRA) is a modern adaptation of the traditional HRA, designed to offer greater flexibility and personalization in healthcare benefits. Introduced in 2020, ICHRA has quickly become a popular choice for businesses of various sizes due to its unique structure and benefits.

Key Features and Benefits

1. Personalized Coverage: ICHRA allows employees to select their own health insurance plans in the individual market, which the employer then reimburses through the HRA. This model provides employees with the freedom to choose a plan that best suits their personal and family health needs.
2. Scalability for Any Business Size: Unlike some HRA options, ICHRA has no minimum or maximum employer size requirements, making it suitable for both small businesses and large corporations.
3. Flexible Contribution Limits: Employers have the liberty to set their own contribution limits with ICHRA. There are no caps on the amount an employer can contribute, providing room for generous healthcare benefits.
4. Tax Benefits: Contributions made by employers are tax-deductible, and reimbursements received by employees are tax-free, provided they are for qualified medical expenses.
5. Customizable Eligibility Classes: Employers can establish different eligibility classes (e.g., full-time, part-time, seasonal employees) and set varying reimbursement rates for each, offering a tailored benefits structure.

Eligibility

To be eligible for ICHRA, employees must be enrolled in individual health insurance coverage or Medicare. This requirement is pivotal as ICHRA funds can only be used to reimburse premiums for these individual policies, not for group health plans. Employers offering ICHRA must also ensure they are not simultaneously offering a traditional group health plan to the same class of employees.

ICHRA provides a modern solution for businesses seeking to offer personalized, scalable, and tax-efficient health benefits. Its adaptability makes it an attractive option for a diverse workforce with varying healthcare needs.

Qualified Small Employer HRA (QSEHRA)

The Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is specifically designed for small businesses, offering a simplified yet effective approach to providing health benefits. Introduced in 2016, QSEHRA has become a favored option for small employers who wish to support their employees' healthcare needs without the complexities or costs associated with traditional group health plans.

Key Features and Benefits

1. Tailored for Small Businesses: QSEHRA is available exclusively to employers with fewer than 50 full-time employees, making it an ideal solution for small enterprises.
2. Tax Advantages: Similar to other HRAs, contributions made by the employer are tax-deductible, and reimbursements are tax-free for employees if used for qualified medical expenses.
3. Contribution Caps: QSEHRA has annual contribution limits set by the IRS, ensuring a level playing field for small businesses and helping to control healthcare spending.
4. Reimbursement of Premiums and Medical Expenses: Employers can reimburse employees for both health insurance premiums and other qualified medical expenses, offering comprehensive health coverage support.
5. No Minimum Participation Requirements: QSEHRA does not have participation requirements, making it a flexible option for small businesses with a diverse range of employee needs.

Eligibility

To be eligible for QSEHRA, employees must have minimum essential coverage (MEC), which can include individual health insurance policies or Medicare. This requirement ensures that the reimbursements made through QSEHRA are used towards legitimate healthcare expenses.

For small businesses seeking a straightforward yet effective way to offer health benefits, QSEHRA presents an attractive solution. Its design caters to the unique challenges faced by small employers, offering both flexibility and cost-control in managing employee health benefits.

Excepted Benefit HRA (EBHRA)

The Excepted Benefit Health Reimbursement Arrangement (EBHRA) is a specialized type of HRA designed to cover specific, non-major medical expenses. It's a versatile solution for employers who want to offer additional health benefits alongside their primary health plans.

Key Features and Benefits

1. Designed for Additional Benefits: EBHRA is intended to reimburse for excepted benefits, such as dental and vision care, short-term limited-duration insurance, and similar expenses not covered by the primary health plan.
2. Complementary to Major Medical Plans: Employers can offer EBHRA alongside a traditional group health plan, but employees are not required to be enrolled in the employer’s primary plan to benefit from EBHRA.
3. Annual Contribution Limits: EBHRA contributions are capped annually by the IRS, providing a controlled, budget-friendly option for employers.
4. Tax Efficiency: Reimbursements from EBHRA are tax-free for employees, and employer contributions are tax-deductible.

Eligibility

EBHRA is available to all employees regardless of their enrollment in the employer’s primary health plan. This inclusivity makes it an accessible option for a wide range of employees, enhancing the overall benefits package.

HRA That Only Pays Excepted Benefits

An HRA designed exclusively to pay excepted benefits is a targeted health reimbursement arrangement focusing on specific, non-core health expenses.

Key Features and Benefits

1. Focused Coverage: This type of HRA is strictly for excepted benefits, providing a narrow yet significant support for expenses like dental and vision care.
2. Employer Flexibility: Employers can offer this HRA as a standalone benefit or alongside other health plans, providing additional flexibility in structuring employee benefits.
3. Defined Contribution Limits: As with other HRAs, there are set contribution limits, allowing employers to manage healthcare budgets effectively.

Eligibility

This HRA variant is available to all employees, offering a straightforward way for employers to enhance their benefits package with specific, targeted health care support.

Retiree-Only HRA

The Retiree-Only HRA is a specialized arrangement designed for retired employees, providing a valuable healthcare funding solution post-retirement.

Key Features and Benefits

1. Exclusive for Retirees: Tailored specifically for retired employees, this HRA supports their unique healthcare needs during retirement.
2. Flexible Spending Options: Retirees can use the funds for a variety of medical expenses, including premiums for Medicare and other health plans.
3. Employer-Controlled Contributions: Employers can determine the contribution levels, offering a customizable approach to retiree health benefits.

Eligibility

To be eligible for the Retiree-Only HRA, individuals must be retirees of the offering company. This arrangement is not available for active employees, focusing exclusively on supporting the healthcare needs of the retired workforce.

How to Know Which HRA is Right to Offer Your Employees

Choosing the right HRA for your employees is a decision that requires careful consideration of various factors. The right choice can significantly enhance your benefits package, while a misaligned HRA might not meet the needs of your workforce effectively. 

Key Factors in Choosing an HRA

When selecting an HRA, consider whether you need to offer more than the QSEHRA allotted amount, how you'll use different classes (such as full-time or part-time employees), and the need for reimbursement options like medical sharing plans or spousal plan premiums. These considerations will help you narrow down the HRA types that align best with your business's and employees' needs.

Assessing Your Business Needs

The size of your business, budget limitations, and the specific demographics and needs of your employees play a significant role in determining the most suitable HRA. A small business with limited resources might find QSEHRA more appropriate, while larger organizations may lean towards ICHRA for its scalability and flexibility.

Understanding Regulatory Compliance

Staying updated with the latest HRA regulations and ensuring that your chosen HRA is compliant are critical. This involves understanding the legal nuances of each HRA type and how they apply to your business structure and employee benefits policy.

Feedback from Employees

Gathering feedback from your employees about their health needs is invaluable. Conduct surveys or feedback sessions to understand their preferences and concerns. This information can guide you in selecting an HRA that resonates with your workforce and addresses their health concerns effectively.

Consulting with Experts

Seeking advice from experienced HRA administrators, like Take Command, can provide you with expert insights into the complexities of HRAs. These professionals can help you navigate the selection process, ensuring that your chosen HRA aligns with both your business objectives and employee needs.

Frequently Asked Questions (FAQs) About HRA Plans

What are the different types of HRA plans?

There are several types of Health Reimbursement Arrangements (HRAs) available, each designed to cater to different business sizes and needs. The primary HRA types include:

• Individual Coverage HRA (ICHRA)
• Qualified Small Employer HRA (QSEHRA)
• Excepted Benefit HRA (EBHRA)
• HRA that only pays excepted benefits
• Retiree-only HRA

Each type has distinct features and eligibility requirements to accommodate a diverse range of employee healthcare needs.

What are two types of HRA?

Two common types of HRAs are:

1. Individual Coverage HRA (ICHRA): Allows employees to choose their own individual health insurance plans, which are then reimbursed by the employer.   

2. Qualified Small Employer HRA (QSEHRA): Designed for small businesses with fewer than 50 employees, offering a simple way to reimburse medical expenses, including insurance premiums.

What is a standard HRA plan?

A standard HRA plan typically refers to an arrangement where an employer reimburses employees for qualified medical expenses up to a certain limit. This could be a traditional HRA, which is often integrated with a group health plan, or one of the more specific types like ICHRA or QSEHRA, depending on the context.

What type of insurance is HRA?

An HRA is not insurance but rather an employer-funded health benefit plan that reimburses employees for out-of-pocket medical expenses and, in some cases, health insurance premiums. HRAs are considered health benefit plans that provide tax advantages by offering employer-funded reimbursements of qualified expenses.

Making the Right Choice in HRAs for Your Business

In navigating the complexities of Health Reimbursement Arrangements (HRAs), it's clear that these plans offer a diverse and adaptable way to manage employee health benefits. From the individualized nature of ICHRAs to the small-business-friendly QSEHRA, there's a type of HRA suited for almost every business need.

As you consider the next steps in enhancing your company's benefits offerings, let the experts at Take Command guide you through your HRA journey to ensure you get set up with ease. With our specialized knowledge, you’ll get tailored advice for your specific situation to ensure your business selects the HRA that aligns with your company's goals and your employees' well-being.

Our team of experts is ready to help you find the right type of HRA plan.