How to vary HRA reimbursement rates

Health reimbursement arrangements, or HRAs, are incredibly appealing to small business owners who want to offer their employees health insurance without worrying about one-size-fits-all group plans and rising costs each year. One of the greatest things about HRAs is that they are customizable and flexible, allowing employers to vary reimbursements based on a number of criteria. Of course, there are rules and regulations in place to protect both employer and employee. Let’s look at the details.

An overarching rule of HRA reimbursement is that employees must be treated fairly. That means you can’t offer some employees more money than others unless they can be fairly separated using the design criteria below. The IRS calls this “same terms requirements” and provides details in Section C of IRS Notice 2017-67.

How much to reimburse

Employers using Qualified Small Employer HRAs have a few options on setting reimbursement rates. The key is rates have to be offered fairly to all eligible employees. Here are the most common tried and true methods we see:

1. Reimburse all the same amount. This is pretty simple. Just pick a rate up to the individual maximum to give all employees.
   (Example: all employees get $300/mo)
   
   
2. Reimburse all the maximum amount. Give all employees the maximum amount they are eligible for under the “single” or “family” categories.
   (Example: for 2021 all single employees would get $441/mo and all employees with dependents would get $891/mo.)
   
   
3. Reimburse different amounts based on family size. Employers can set different rates based on an employee’s dependents. The IRS requires that employers choose a reference plan or offer a fair percentage of the maximum.
   (Example: Single employees get $200/mo, married employees get $400/mo, and employees with families get $600/mo)
   
   
4. Reimburse different amounts based on employee age. Employers can vary rates by age but they must be tied to a reference plan on the individual market. To save you significant hassle though, most marketplace plans offer premiums in a 1:3 ratio for individuals ages 26 to 64.
   
   Example: You could set reimbursement rates for a 26 year old $100/mo and a 64 year old $300/mo using the 1:3 ratio. A 37 year old employee gets whatever amount on the linear line in between the 26 and 64 year old—Get ready to dust off your old algebra skills! The answer for the 37 year old in this example is $158/mo.

Enjoy even more reimbursement flexibility with ICHRA classes

Employers that opt to offer an Individual Coverage HRA enjoy all of  the options listed above as well as another layer of distinction. To help employers prioritize their health benefits budget, the individual coverage HRA classes separate employees into groups by legitimate job-based criteria like hours worked or location. Different employee classes can be awarded different levels of benefits.

This is a hallmark characteristic of this new HRA that gives business owners a lot of flexibility with the design. On top of that, the allowances can be increased within each class based off of age and number of dependents - as we talked about before.

• Full-time employees
• Part-time employees
• Seasonal employees
• Employees covered under a collective bargaining agreement
• Employees in a waiting period
• Foreign employees who work abroad
• Employees working in the same geographic location (same insurance rating area, state, or multi-state region)
• Salaried workers
• Non-salaried workers (such as hourly workers)
• Temporary employees of staffing firms
• A combination of two or more of the above (which makes the possibilities basically endless! 

What we’ve seen from early adopters of ICHRA is to keep the design simple, varying reimbursements within each class based on either age or number of dependents.

Example: An employer can opt to offer a $200 per month ICHRA for part-time workers, $400 for remote workers that might be in more expensive markets, and a traditional group plan for full time workers at headquarters.

Example: Using the new hire rule, an employer can offer new employees an ICHRA while grandfathering existing employees into a traditional group health plan.

Need help deciding on HRA reimbursement rates? 

Our team of design consultants is waiting to help you. HRAs are a simple benefit that can be designed to maximize your health budget (not to mention ICHRA setup is so easy!).  Read our ICHRA Guide or our QSEHRA guide , or chat with our team with any questions you may have about these new, tax-friendly benefits. We would be happy to help.