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how do HRAs work
Small Business

How do HRAs work?

How do HRAs work? If you're wondering how does an HRA works, look no further. An HRA, or health reimbursement arrangement, 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. 

They're also an effective recruitment and retention strategy. 

How does an HRA work?

The way HRAs work is fairly simple. First, an employer determines a set budget for monthly reimbursements. Then, employees purchase an individual health insurance plan that works for their family. Lastly, they submit receipts and get reimbursed on their paycheck. These arrangements are tax-free!

Cool, right?

What are the types of HRAs?

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.

Who funds an HRA?

An HRA is funded solely by an employer. Employees cannot contribute. The "funds" are only available after an expense has been incurred, so there is no need to pre-fund an account. 

Ready to learn how much you can reduce benefits cost?

Are there tax benefits to HRAs?

Absolutely! That's why we love them. HRAs are not subject to income tax, payroll tax, or employer tax.

What can be reimbursed with an HRA? 

Employers can choose to reimburse for health insurance premiums and qualified medical expenses or just reimburse for premiums. That's at the discretion of the employer. 

  • Major medical individual health insurance premiums (metal tier in the name!)
  • Dental care premiums
  • Vision care premiums
  • Medicare Part A or B, Medicare Part C, and supplemental plans
  • COBRA premiums

Qualified medical expenses can also be reimbursed! While there are more than 200 items on the IRS list, here are a few of our favorites:

  • Copays
  • Prescriptions 
  • Tests and scans
  • Eye glasses + contacts
  • Therapy + Counseling
  • Chiropractic Care and Acupuncture 
  • Over the Counter Drugs
  • Feminine hygiene products
  • Sunscreen

For the full list, check out our post on "What expenses are eligible through my HRA?

Can you use an HRA with an HSA? 

The answer is yes, but there's a catch (isn't there always?). The IRS has some pretty specific rules about how these two tax-advantaged tools work together.

Here are the main rules to remember.

You can use HSA funds any time to cover medical expenses, as long as you don't submit for reimbursement of the same expenses from your employer. No double dipping. More on HRAs and HSAs here. 

Do HRA funds rollover? 

Since HRAs are arrangements, not accounts, the funds are kept my the employer and do not roll over. 

Ask us about tax-free health insurance reimbursement!

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. Employers reimburse employees' premiums. 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. 

For reference, QSEHRA contribution limits for 2022 are:  

  • Individual: $5,450 ($454.16/month)
  • Family: $11,050 ($920.83/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!

Still have questions about how HRAs work? 

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. 

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