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What Is an HRA?
HRAs have changed the game, allowing small businesses to provide big business benefits.
Introduction to HRAs
Traditional group health plans (GHPs) have grown increasingly difficult for small businesses to provide.
They are often expensive, complex, and offer limited choices to employees when it comes to their healthcare. As rates inevitably rise, employers often find themselves switching providers every 1-3 years, requiring additional time and cost to maintain.
Health reimbursement arrangements (HRAs) are employer-funded plans that reimburse employees for qualified medical expenses, including insurance premiums. Employers claim tax deductions for reimbursements and reimbursement dollars received by employees are tax-free. For small business owners in particular, HRAs allow employees to benefit from premium tax credits from the Marketplace, often dramatically reducing the cost of their benefits.
In this guide, we'll cover the basics of HRAs, the two most popular types of HRAs for small businesses, how to determine if an HRA makes sense for your business, and what it looks like to implement and maintain your plan.
So what is an HRA?
An HRA is essentially a spending account for health insurance and/or qualified medical expenses.
HRAs are provided and owned by you, the employer. Your employees use the money to pay for qualified expenses (as defined by the IRS), including health insurance premiums, pharmacy costs, dental and vision. The employer has a wide degree of discretion over what the HRA covers.
How do HRAs work?
All HRAs follow a basic, four-step structure.
1) Employers offer a monthly allowance dedicated to health spending.
2) Employees pay for medical coverage costs, including health insurance premiums (employers have the option of providing pre-funded debit cards or paying for premiums out of their business account so employees are never paying out-of-pocket).
3) Proof of qualified medical expenses are documented and submitted by employees (or by a 3rd-party) for tax-free reimbursement.
4) Once approved, the employer reimburses employees up to their set HRA amount (pre-funded health insurance premiums are "automatically" approved and approvals for other expenses can be outsourced).
What are the key differences between group plans and HRAs?
For small businesses in particular, GHPs tend to be more expensive, more time-consuming, and more limited in choice of coverage.
GHPs provide employees with generally the same limited plan(s), whereas HRAs allow employees to choose their own plans. Additionally, group rates are set by providers and employers determine how much they want to cover on behalf of their employees. If plan rates increase, the employer must determine whether to remain with the group plan and pay the higher rate, or shop for a new plan.
With HRAs, the employer determines what amount he wants to pay, and allows employees to choose the plans that fit them best. Critically, HRAs do not disqualify employees from receiving subsidies (referred to as premium tax credits or PTCs) from the Marketplace (HRA amounts are merely deducted from the total monthly PTC amount).
This is truly a game-changer for small businesses, so we've written an entire guide dedicated just to this topic. To learn more about premium tax credits or for a deeper dive on the differences between group plans and HRAs, click the corresponding links below.
How much do I have to contribute per employee?
That's up to you.
Employers choose a monthly amount based on their budget and business, and they can decide which expenses they want to reimburse. IRS Publication 502 offers a complete list of eligible expenses, but employers can limit the list of what they offer to their employees.
Depending on the HRA, employers can also choose how much they offer per type of employee (or employee class).
Are HRAs better than group plans?
HRAs are typically a win-win, improving the benefits plan for both employers and employees.
Depending on the HRA being offered, its flexibility allows employees to pay for qualifying care, treatment, supplies, and insurance premiums that work best for them. As mentioned above, the employer will typically outline what qualified expenses are included in their benefit. Some employees will see dramatic cost reductions in their coverage.
No two employees are alike. They have different wants, needs, lifestyles, and health concerns. It’s easier to support diversity and inclusivity with an HRA compared to a one-size-fits-some traditional group plan. By offering this well-rounded health benefit, each employee has the freedom to choose the unique medical services and best local healthcare providers for their needs.
For employers, HRAs are a great way to reduce costs, eliminate many of the administrative headaches associated with group health insurance, and still offer a comprehensive health benefit.
Is an HRA similar to an health spending account (HSA)?
HRAs are not HSAs. While there are some similarities, they differ in significant ways.
HSAs are employee-funded, employee-owned accounts that are capped at roughly $4,000 annually and require employees to purchase high deductible health plans (HDHPs). HRAs are employer-funded, employer-owned accounts that may or may not be capped and don't have to be paired with an HDHP. A few more key differences are:
• Employees cannot take HRA funds with them if they leave the company.
• HSAs cannot be used to pay for insurance premiums (except in the case of COBRA). HRAs can be used for premiums (and can be paired with premium tax credits).
• Employees can claim tax deductions for HSAs. With an HRA, reimbursable expenses won't be counted as part of the employee's taxable income.
• If an employee has unused money left in his or her HSA at the end of the year, it will automatically roll over to the following year. Depending on the HRA plan type and employer's discretion, HRA funds may or may not roll over.
What are the different types of HRAs?
There are several types of HRAs available, and each one offers tax benefits.
Three of the most popular options are the qualified small employer HRA (QSEHRA), the individual coverage HRA (ICHRA), and the integrated HRA, also known as a group coverage HRA (GCHRA). When choosing the right HRA for your business, here's a rough guideline to follow:
Use a QSEHRA if you’re an organization with fewer than 50 full-time equivalent employees (FTEs); you're looking for easy-to-manage, simple-to-deploy health benefits; and if your budget is less than $450 per employee per month.
Use an ICHRA if you want the flexibility to offer different allowances to different classes of employees or if you want to offer more than $450 per month per employee in benefits.
Use a GCHRA if you want to supplement an existing group health insurance plan by reimbursing employees for out-of-pocket medical costs such as deductibles.
For a deeper dive on the types of small business HRAs, click here.
Are Marketplace plans just as good as other plans?
Yes, they are essentially the same plans.
Marketplace plans and non-Marketplace plans are generally mirror images of each other, though off-Marketplace plans don’t provide premium subsidies and enrollees have to pay rate increases themselves. This means that people who don’t receive PTCs will generally pay less by picking lower-cost off-Marketplace health insurance on a private website.
How do I coordinate an HRA with premium tax credits?
HRAs allow employers to reimburse employees for health insurance policies and out-of-pocket costs tax-free.
Employees can choose their own health plan, and you will reimburse them for premiums and other qualifying medical expenses up to their monthly allowance (although you can also pay for their premiums from the HRA allowance directly, a topic to be covered in a related guide).
This gives employees more freedom to choose an affordable coverage option than traditional employer-sponsored coverage while saving employers money. But what about employees with premium tax credits? How can they take advantage of an HRA? Because HRA allowances pay for health insurance premiums with tax-free money, employees must account for their allowance and any premium tax credits or advanced payment. However, this works differently under each type of HRA.
(Understanding the different types of HRAs can be tricky, which is why we wrote this simple quiz which will tell you what HRA is the best fit for your business)
With a QSEHRA, employees can keep their health coverage tax credit and participate in the QSEHRA. However, employees must reduce their subsidy by the amount of their QSEHRA allowance.
If you choose to offer an ICHRA, your employees must choose between the ICHRA or their premium tax credits. They can waive their subsidy altogether if their ICHRA is considered "affordable." If it's not considered affordable, they can opt out of the ICHRA and continue collecting their PTCs.
For a deeper dive on the types of small business HRAs, click here.
To learn more about affordability and why it's important to you, see the answer to "What does affordability mean when it comes to my HRA?" in our QSHERA Guide.
How do I get started? What's the next step?
All we need is some basic information about your business, and we will provide you with a free benefits analysis.
We'll gather together the total premium tax credits your employees are eligible for, we'll include a list of available plan options form the Marketplace, we'll compare those costs to your existing costs (or expectations), and we'll recommend an HRA allowance that maximizes the total PTC balance available in order to get your monthly cost of benefits as low as possible under the regulatory guidelines.
If you're currently offering a GHP, then our summary will give you a great idea of what you could save with an HRA. If you're providing benefits for the first time, then we'll show you what your options look like with an HRA vs a traditional group plan.
Fill out the form by clicking "Get Started" and schedule a quick call with our experts today. You'll be glad you took the the 2 minutes.
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