A health reimbursement arrangement, or HRA, is very regulated, but it isn’t too complicated, and its purpose is pretty simple: to help employers and employees afford healthcare coverage without worrying about rising healthcare costs. It accomplishes this through reimbursing for health premiums and expenses tax-free.
While they've been around for a while, HRAs are gaining traction recently among businesses of all sizes due to regulatory rule changes that make them more accessible, flexible and easy to use. An alternative to traditional group plans, these 401(K) style benefits put the power in the employees' hands, shifting the risk from the employer and offering more personalization and choice for workers. There are also an effective recruitment and retention strategy.
There are several HRAs available today, but the two major types of HRAs that business owners should know about are relatively new to the market. They are ICHRA (individual coverage HRA), a 401(K) style benefit solution with no company size limitations or reimbursement limits, and QSEHRA (qualified small employer HRA), which is designed for companies with less than 50 employees.
Why HRAs are great: Employees pay for health expenses, you reimburse them, tax-free.
So is it really that simple? We think so. Let's walk through how HRAs work.
Here's the play by play.
A step by step guide to how HRAs work
1. Employers design their plan and set reimbursement allowances
In general, employers have a lot of flexibility with how they design and implement a HRA. Especially with the ICHRA, with its 11 different classes, employers can reimburse different groups at different rates. HRAs can be scaled to reimburse more for employees with families or by employee age. An overarching rule though is that employees must be treated fairly. Very important!
2. Employees sign up for the health insurance plan of their choice and pay their medical bills
More than likely, your employees are going to be very excited about this option. Instead of being locked into a group plan that they had little to no input about, they can choose their own doctors and providers! They must be enrolled in an insurance plan to qualify for the HRA, but it can be a spouse’s plan (if it's a QSEHRA), their parent’s (if they are under 26), or an individual plan that meets MEC.
3. Employees provide proof of their expenses
After their doctor’s visit or a prescription refill, employees simply snap a picture of their paid bill (or receipt) and submit it for reimbursement. This may seem obvious but often gets overlooked! Employees have to prove they spent money on an eligible health expense before they can be reimbursed.
4. Employers reimburse the employee
The key takeaway here is that payments are actually reimbursements. Employees will pay the insurance company or doctor’s office directly and then submit a claim to get reimbursed for their expenses tax-free.
While Individual Coverage HRAs do not have maximum or minimum reimbursement amounts, all QSEHRA reimbursements are subject to annual maximums and become available to employees on a monthly basis. This means employees can’t take the full annual amount in January—instead, the funds become available to employees each month.
QSEHRA reimbursement rates for 2020 are: for individual- $5250/year, $437.50/month and for families, $10,600/year, $888.33/month.
Pro-tip: Unclaimed funds stay with the employer. If an employee is not eligible or does not make a claim in a given plan year, the employer keeps the money. Sweet!
Ready to get started?
We are ready to chat on our website if you have any specific questions about your business and how HRAs could help. Setting up a small business HRA is simple and quick, and our team is here to help if you need it.