As healthcare costs continue to rise, it's becoming increasingly important for both employers and employees to find creative ways to manage expenses while maintaining high-quality coverage. Enter the Health Reimbursement Arrangement (HRA) — a flexible, tax-advantaged solution that empowers employers to help their workforce cover a wide range of healthcare expenses.
In this post, we'll break down the benefits of HRAs, highlighting how they can save money, offer greater flexibility, and enhance overall employee satisfaction. So let’s dive into the advantages of HRA!
What is a Health Reimbursement Arrangement (HRA)?
First, let's take a moment to understand exactly what an HRA is and how it functions.
An HRA is an employer-funded account designed to reimburse employees for qualified medical expenses.
The primary goal of an HRA is to provide a tax-advantaged way for employers to help employees with their healthcare costs, ultimately making healthcare more accessible and affordable.
How does an HRA work?
- Employer-funded: Unlike a Health Savings Account (HSA) or Flexible Spending Account (FSA), HRAs are funded solely by the employer. There are no employee contributions, and the employer decides the annual contribution amount for each employee's HRA.
- Tax-advantaged: Employer contributions and employee reimbursements through an HRA are tax-free, meaning they're not subject to federal income tax, Social Security tax, or Medicare tax. This tax-free status benefits employers and employees, allowing for more cost-effective healthcare spending.
- Reimbursement for qualified expenses: Employees can use the funds in their HRA to pay for various qualified medical expenses, including co-pays, deductibles, dental care, vision care, and prescription medications. Employees must submit proof of their medical expenses to the employer for reimbursement.
- Flexible plan design: Employers can customize HRAs to fit the specific needs of their organization and workforce. They can decide which expenses are eligible for reimbursement, set contribution limits, and establish other plan rules based on their preferences and budget.
- Rollover and forfeiture: Depending on the HRA plan design, unused funds may roll over from one plan year to the next, up to a certain limit. Alternatively, employers can opt for a "use-it-or-lose-it" policy, where unused funds are forfeited at the end of the plan year.
The Advantages of Health Reimbursement Arrangements (HRAs)
Now that you understand what an HRA is and how it works, let's examine the numerous benefits that make it an attractive option for employers and employees. From cost savings to increased flexibility, HRAs offer a range of benefits that can contribute to better healthcare options and overall employee satisfaction.
- Cost Control and Predictability: One of the most significant advantages of offering an HRA is the ability for employers to control and predict their healthcare costs. By setting a specific annual contribution amount for each employee, employers can better manage their budget and avoid unexpected expenses. This predictability allows for more effective financial planning and can help businesses maintain a healthier bottom line.
- Tax Advantages: One of the biggest advantages of an HRA is that it offers tax benefits, meaning employer contributions and employee reimbursements are not subject to federal income tax, Social Security tax, or Medicare tax. This tax-free status results in savings for employers and employees, making healthcare spending more cost-effective.
- Flexibility and Customization: HRAs offer a high degree of flexibility and customization, allowing employers to tailor their plans to meet the specific needs of their organization and workforce. Employers can decide which expenses are eligible for reimbursement, set contribution limits, and establish other plan rules based on their preferences and budget. This flexibility ensures that the HRA can be designed to support the unique healthcare needs of each employee.
- Increased Employee Satisfaction: By offering an HRA, employers are committed to supporting their employees' healthcare needs. This commitment can increase employee satisfaction, as employees feel valued and supported in managing their healthcare costs. Furthermore, the flexibility of HRAs allows employees to use their funds for a wide range of qualified medical expenses, giving them greater control over their healthcare decisions.
- Retention and Recruitment: Offering an HRA as part of your employee benefits package can help attract and retain top talent in your industry. A comprehensive benefits package, including a robust healthcare offering, is a significant factor for many job seekers when evaluating potential employers. By providing an HRA, your organization can stand out as an employer that values and supports its employees' well-being.
From cost savings and tax advantages to increased flexibility and employee satisfaction, HRAs can serve as a valuable tool in managing healthcare expenses and creating a more supportive workplace environment.
By considering your organization's and workforce's unique needs, you can determine if an HRA is a right choice for your employee benefits strategy.
{Talk to our expert team about an HRA for your business}
Types of HRAs
If you're considering offering an HRA to your employees, it’s important to understand the types of HRAs available and how each is designed to cater to the unique needs of each business. So let’s explore the two most common types of HRAs (both of which Take Command offers) and the key features and benefits of each.
Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)
Designed specifically for small businesses with fewer than 50 full-time equivalent employees.
- No group health plan required: Employers cannot offer a group health plan to any of their employees while providing a QSEHRA.
- Employer-funded: Like all HRAs, QSEHRAs are funded solely by the employer, with no employee contributions allowed.
- Annual contribution limits: The IRS sets annual contribution limits for QSEHRAs, which are subject to adjustment each year. For 2021, the limits were $5,300 for individual coverage and $10,700 for family coverage.
- Reimbursement for individual health insurance premiums: QSEHRA allows for reimbursement of individual health insurance premiums, in addition to other qualified medical expenses.
- Tax advantages: Contributions and reimbursements made through a QSEHRA are tax-free for both employers and employees.
- Coordination with premium tax credits: Employees participating in a QSEHRA may still be eligible for premium tax credits for individual health insurance coverage through the marketplace. However, the amount of any tax credit will be reduced by the amount of the QSEHRA benefit.
Individual Coverage HRA (ICHRA)
A flexible HRA option available to employers of all sizes, designed to integrate with individual health insurance coverage.
- No employee size restrictions: ICHRAs can be offered by organizations of any size, from small businesses to large corporations.
- No group health plan required: Employers offering an ICHRA cannot provide a traditional group health plan to the same employees who are eligible for the ICHRA.
- Individual health coverage requirement: Employees must have individual health insurance coverage, either through the marketplace or another source, before they can participate in an ICHRA.
- Employer-funded: ICHRAs are funded solely by the employer, with no employee contributions allowed.
- No annual contribution limits: Unlike QSEHRAs, there are no set annual contribution limits for ICHRAs, giving employers greater flexibility in determining their contributions.
- Reimbursement for individual health insurance premiums: ICHRA allows for reimbursement of individual health insurance premiums, in addition to other qualified medical expenses.
- Tax advantages: Contributions and reimbursements made through an ICHRA are tax-free for both employers and employees.
- Flexible plan design: Employers can design ICHRAs to meet the needs of their workforce, including setting different contribution levels based on employee classifications (e.g., full-time, part-time, or seasonal employees).
- Coordination with premium tax credits: Employees participating in an ICHRA may still be eligible for premium tax credits for individual health insurance coverage through the marketplace, but only if the ICHRA is considered "unaffordable" based on IRS guidelines. In such cases, the employee must choose between the ICHRA benefit and the premium tax credit, but cannot receive both.
Pros and Cons of HRAs
HRAs offer numerous benefits for both employers and employees, but they also come with certain challenges that should be considered before implementation. To help you make an informed decision about whether an HRA is right for your business, we've compiled a comprehensive list of pros and cons to help you evaluate the impact of HRAs on your business and determine if this healthcare solution aligns with your company's objectives and employee needs.
Pros of HRAs
Cost control and predictability: Employers can better manage their healthcare budget by setting specific annual contribution amounts for each employee's HRA.
Tax advantages: Employer contributions and employee reimbursements through HRAs are tax-free, benefiting both parties through cost-effective healthcare spending.
Flexibility and customization: HRAs offer a high degree of flexibility, allowing employers to tailor their plans to meet the specific needs of their organization and workforce.
Increased employee satisfaction: Offering an HRA demonstrates an employer's commitment to supporting their employees' healthcare needs, leading to higher satisfaction levels.
Retention and recruitment: Including an HRA in the employee benefits package can help attract and retain top talent, as a comprehensive benefits offering is an essential factor for many job seekers.
Cons of HRAs
- Administrative burden: Implementing and managing an HRA requires a certain level of administrative efforts, such as processing reimbursements, tracking contributions, and ensuring compliance with regulations. When you partner with Take Command, we’ll shoulder the administrative burden so you can rest easy!
- Limited employee awareness: Employees may not fully understand the benefits of HRAs or how to use them, leading to the underutilization of available funds. As your HRA administrator, Take Command ensures your employees fully understand how to use their HRA benefits.
- Potential for unused funds: Depending on the HRA plan design, employees may not use all of their allocated funds, leading to potential waste or rollover issues. As the employer, this is actually a benefit for you!
- Coordination with other health accounts: Navigating the rules around coordinating HRAs with other health accounts, such as Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs), can be complex and may limit employee participation. Don’t worry, Take Command has your back on all things compliance!
- Employee eligibility requirements: Ensuring employees meet the eligibility requirements for certain types of HRAs, such as maintaining individual health insurance coverage for ICHRAs, can create additional administrative challenges. We’ll help with this, too!
- Regulatory compliance: Employers must stay informed about ever-changing HRA regulations and ensure their plans remain compliant with federal and state laws. Catching on now? Yup, we’ll cover this, too!
Think an HRA might be right for you?
If you think an HRA might work for your business, reach out to our HRA administrator experts or read through our new HRA Guide. If you're still weight the options between HRAs vs FSAs, this HRA vs FSA post is for you.
