You want to provide health insurance for your employees, but the high cost and the administrative work involved can be intimidating. One option that might work for you is a Health Reimbursement Arrangement (HRA). The employer-funded plan reimburses workers for approved healthcare expenses.
HRA health plans were designed to cover healthcare costs not covered by high-deductible health insurance, such as vision care. When the Affordable Care Act (ACA, also known as Obamacare) took effect in 2010, HRAs were generally offered as part of a group health plan. Today you have more options for offering HRAs.
Thanks to recent rule changes, you can offer standalone HRAs. Your employees can use them to pay for premiums and out-of-pocket costs. HRAs set limits on healthcare costs, so they’re more affordable for you. Your employees get tax-free reimbursement on a plan that meets their specific needs.
What You Need to Know
HRAs expand your options and save you money when offering healthcare benefits to youremployees.
With an HRA, you set limits on how much and what kind of healthcare you’ll cover.
HRAs are funded by employers only. Employees can’t contribute to them.
How Do Health Reimbursement Arrangements Work?
HRA medical plans provide employees an allowance each month to spend, if needed, on healthcare.
Your employees can’t access or withdraw funds. No money changes hands until an employee gives you documentation and receipts for approved care. You issue a reimbursement, up to a preset maximum amount.
You decide the limit on the funds available to employees, with the exception of the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). The IRS sets limits on how much you can contribute to that specific HRA.
What Are The Tax Considerations If You Offer a Health Reimbursement Arrangement?
For your employees, the money they’re reimbursed is tax-free. For you, the money you spend on reimbursements is a write-off, like any other business expense. Keep receipts and documentation for the reimbursements in case of audit, but you’re not required to report them in general.
Be aware that offering an HRA doesn’t qualify you for the small business healthcare tax credit, which is generally available only to employers who offer insurance through the Small Business Health Options Program (SHOP).
What Medical Costs Can a Health Reimbursement Arrangement Pay For?
Employees can use their HRA to cover the costs of healthcare expenses. Stand-alone HRAs can be used to pay premiums, copays and prescriptions for an ACA Marketplace plan they’ve chosen. An HRA offered with group insurance can help employees offset the cost of a high-deductible health plan (HDHP).
An HRA covers healthcare costs that aren’t covered by other types of insurance, like eye exams, fertility treatments, and hearing aids. In addition, employees can be reimbursed for the medical expenses of their spouses and kids (up to age 27).
Employees can’t use HRAs to cover gym memberships, nonprescription medicines, or vitamins and supplements. Ultimately, you decide what’s included in your HRA.
How Many Small Businesses Use Health Reimbursement Arrangements?
There isn’t a lot of information on the number of businesses using HRAs. According to a 2017 report from the Kaiser Family Foundation, only half of small businesses offer any kind of health insurance benefit to employees.
In 2020, new rules allowing HRAs for individual coverage came into effect. The U.S. government estimates that 800,000 employers will decide to offer this HRA.
Highlights
You can also set rules for your HRA, such as not allowing the funds to roll over. And you decide which services the plan will cover.
What Are the Different Types of Health Reimbursement Arrangements?
There are three different HRA benefits you can offer employees. Choosing which is right for you depends on your business’s size, budget, and goals. Here are your options:
Group Coverage HRA (GCHRA) / Excepted Benefit HRA
A group coverage HRA is for businesses that already offer employees group health insurance. It works with all group health insurance plans, but it’s best for businesses that offer high-deductible health plans (HDHP).
HDHPs can be a financial burden on employees with chronic health issues or health emergencies. A GCHRA can help employees afford big medical expenses.
Qualified Small Employer HRA (QSEHRA)
Created in 2016, the QSEHRA is for businesses with fewer than 50 employees that don’t offer another group health plan or flexible spending arrangement (FSA). These plans must offer the same terms across employee classes, and QSEHRAs cannot offer dental and vision cover.
It’s important to understand that there are limits to how much money you can offer employees through a QSEHRA. In 2020, the limits on a QSEHRA are $5,250 per year or $437.50 per month for an individual and $10,600 per year or $883.33 per month for a family.
Individual Coverage HRA (ICHRA)
These new HRAs are open to businesses of any size and put no limits on the amount you can contribute. They can’t be offered along with another group health plan. Unlike QSEHRA plans, ICHRA plans can vary by employee classes and, with an ICHRA, you do have the option of covering dental and vision coverage.
What Are the Pros of Health Reimbursement Arrangements?
HRAs cost much less than offering group health insurance. Because you set a limit on the total amount you’ll reimburse employees, you can budget more confidently.
You can also set rules for your HRA, such as not allowing the funds to roll over. And you decide which services the plan will cover.
What Are the Cons of Health Reimbursement Arrangements?
You’ll likely want to hire a third-party administrator to oversee the plan. You’ll also want your administrator to review the paperwork your employees submit for reimbursement. If you have only a few employees, this can potentially eat away at your cost savings.
You need to have money on hand to provide reimbursements, and unexpected medical expenses can hurt your cash flow.
You might also have complaints from employees about the required paperwork, or about healthcare costs that aren’t reimbursed.
What Else Do You Need to Know About Health Reimbursement Arrangements?
- HRA health plans are employer-funded, and employees don’t contribute to their plans.
- HRA medical plans aren’t Health Savings Accounts (HSAs), which are employee-owned accounts for healthcare costs or retirement savings, or Flexible Spending Accounts (FSAs), which can also be used to cover medical expenses. Those plans are employee-owned.
Next Steps
HRAs can be a budget-friendly option for your business and help you recruit employees by offering coveted health benefits. Consider your finances and your employees’ medical needs to decide whether these plans are the best choice.
