As a business owner, you have many responsibilities and a lot on your plate. If you’re thinking about how you can offer health benefits to attract and retain good talent, but adding group health insurance seems daunting, consider a Health Reimbursement Agreement (HRA). Save time and money while supporting your employees' health and well-being with an HRA for small businesses.
HRAs have become popular in recent years, thanks in part to the freedom and control that they offer employers. But what does HRA mean? More specifically, what is an HRA plan? An HRA is a Health Reimbursement Arrangement or a type of health plan that allows employers to reimburse employees for healthcare-related expenses. While traditional group health plans leave little room for customization, HRAs help give some of that power back to employers and employees so that they can work towards solutions on a more individual level.
HRAs for Dummies
This HRA for Dummies will cover the following critical topics:
- What does HRA stand for?
- What an HRA is?
- How do employees use an HRA?
- How does an HRA work?
- Benefits of HRAs
- HRA pros and cons
- What expenses can be reimbursed with an HRA
- How HRAs benefit business owners
- Types of HRAs and which one is best for your business
- How to decide between an HRA and a group plan
- Understanding HRA vs HSA
- HRA Requirements
- HRA FAQs for employees
- HRA setup process
HRA stands for health reimbursement arrangement.
What's an HRA and how do I use it?
Health reimbursement arrangements are tax-advantaged "arrangements" that allow employers to reimburse their employees for health insurance rather than choosing it for them.
Employees shop for a health plan that works best for their family and then get reimbursed on their paycheck. Employees then pay for their health expenses — including health insurance premiums and out-of-pocket medical costs — and employers reimburse them for one or both, whatever they decide.Here are a few high level things to remember about HRAs:
- They are tax-free, not subject to income tax, payroll tax, or employer tax
- They allow businesses of all sizes to take away risk and control their budget
- They help employees pay for their health insurance
- They can be used to reimburse premiums or medical expenses or both
- There are several types of HRAs (more on that later!)
- They are an arrangement, not an account, so there is no pre-funding
- They work for any budget and any size of company
How does health reimbursement arrangement (HRA) coverage work?
Here’s how an HRA plan works in four simple steps:
- Employers design their plans and set reimbursement allowances
- Employees pay for their health insurance and medical bills
- Employees provide proof of their expenses to your HRA administrator
- Employers reimburse the employee
An HRA gives employers flexibility and empowers employees to take charge of their health insurance plans.
As a result, your employees get to select the health care plan that works best for them without being tied to a one size fits all plan many businesses offer.
It can be difficult to find health insurance plans that are affordable and reasonable for both you and your team.
With an HRA, you can remove the headache of traditional business-offered health insurance plans and put the power back into the hands of your team by providing reimbursements for qualified health care expenses.
Is HRA coverage the same thing as HRAs?
HRA Coverage is a model of employer health insurance that is utilized to reimburse employees for their medical expenses. It's also referred to as health reimbursement arrangements, health reimbursement accounts, or HRAs. Employees get reimbursed tax-free up to the maximum amount the employer will repay for health care costs for a set amount of time. Unused amounts may be rolled over to be used in subsequent year. The employer not only funds the HRA but also owns it.
→ Check out our official guide on HRAs to learn more!
Benefits of HRAs
One of the primary advantages of HRA plans is that employers have greater control over their total benefits spend. By working with HRAs, employers can set limits based on their employees’ needs and what is best for their companies. Here are some additional benefits of HRAs from the employer end:
- The ability to set a budget
- Better control/predictability for rates
- Greater flexibility with plan design
- Tax advantages (HRA accounts aren’t subjected to payroll taxes)
- Only paying for what employees actually want and use
- Freedom from group participation requirements
In addition, HRAs offer numerous advantages to employees, including the following:
- Being able to choose plans that are tailored to their individual needs
- The privilege of keeping their pre-existing health insurance plans
- Tax benefits (i.e., no income tax paid by employees)
- Plan portability, no losing your health insurance if you change jobs or lose your job
As is the case with anything related to health insurance, it’s important that employers also consider the disadvantages of HRAs. While HRAs are a terrific alternative to other group-based health plans, they are not without their downsides. For example, if you’re an employee that’s considering switching companies, you should note that your HRA funds will not transfer with you. From the employer’s perspective, it can be difficult to obtain buy-in from employees if they’re already working with plans that they like. Change management is very important to mitigate this. What’s more, some locations are more advantaged than others in terms of the variety, quality and price of individual health insurance plans that are offered.
Pros and Cons of an HRA
There are always upsides and downsides to consider when deciding which HRA health reimbursement arrangement is best for your business or client.
Here are a few HRA account pros and cons.
- Employees can use it for medical and dental expenses, prescriptions, annual exams, birth control medications, and more.
- Employees choose providers and plans.
- Some HRA designs (including all of Take Command’s products) allow employees to use their HRA for insurance premiums
- Unused funds can roll over at the employer's discretion.
- Tax-advantaged funds for medical expenses
- Some types of HRAs prompt a Special Enrollment Period, meaning it’s easier for employees to sign up for health insurance within 60 days of that change.
- If an employee loses their job or quits, they keep their health insurance.
- Funds stay with the employer if an employee leaves the company. Note: this is actually a pro for employers.
- Employees cannot use it for cosmetic costs such as teeth whitening or other procedures or products deemed unnecessary. Again, this would be considered a pro by most employers.
- There may be plan-based employer contribution limits depending on what type of HRA is offered
- Provider options may be limited based on the insurance market per geographical region.
- In some cases, employees on spouse’s plans cannot get reimbursed for their spouse’s premiums.
- For some types of HRAs, the HRA offer can replace premium tax credits that some individuals receive.
- Some HRAs don’t integrate with medical sharing plans or TRICARE, among others.
For a more comprehensive, detailed list of pros and cons, check out our HRA account pros and cons blog.
Is an HRA the same as health insurance?
Glad you asked!
No, it is not.
→ Here's a handy post on how HRAs work
Is an HRA a good plan?
Health reimbursement accounts are a superb way to provide equal health benefits and allow their employees to pay for their medical expenses for their individual needs.
For the employer, it is economically more pleasing than group health insurance.
For the employee, they get flexibility that would not be an option with a group health plan.
A new way to offer health benefitsIn the post-pandemic work landscape, companies are balancing a combination of remote workers, contractors, and full and part-time employees with hybrid schedules.
This new way of work is ushering in a new way of approaching healthcare and managing teams. The Take Command HRA platform provides an easy-to-use dashboard that onboards employees and helps them navigate the system where they can easily shop and compare available individual insurance plans and get set up with just a few clicks.
Employees want and appreciate work flexibility, which transfers to employer benefits.
With HRA plans, each employee selects the best insurance plan for them and controls the coverage level, then submits claims to the HRA administrator for reimbursement.
At the same time, employers can quickly access their company information to effectively manage your plan, all while leaving the heavy lifting (and keeping the IRS satisfied) to us.
HRAs are increasing in popularity because they allow businesses of all sizes to offer an affordable group benefits alternative to their employees.
What expenses can be reimbursed by an HRA?
It’s up to each employer to decide whether they will reimburse premiums only or premiums along with qualified medical expenses.
Some commonly covered medical expenses include:
- Blood glucose monitors
- Blood pressure monitors
- Dental care
- Hospital expenses
- Monthly premiums for qualified individual insurance plans
- Over-the-counter medicine
- Payments toward a deductible
- Prescription drugs
- Routine doctor visits
- Vision care, including eyeglasses, contact lenses and exams
→ Read on for the complete list of HRA eligible expenses!
→ More information on how HRAs work for expenses for spouse, family or dependents
What are the benefits of an HRA for business owners?
Companies of all sizes can provide more freedom by offering an HRA to all employees who want to participate in the arrangement. Each employee can use the HRA administration platform to shop for an individual insurance plan that makes sense for their health, budget, and family situation.
When you partner with an HRA administrator like Take Command, we’ll make sure your team understands the benefits of the HRA and how they can choose a healthcare plan that suits their needs — giving them complete control over their coverage, network, premium — and get reimbursed for qualified medical expenses such as copays, prescriptions and premiums.
You can rest easy knowing your HRA administrator will ensure compliance and reporting, manage and process claims, handle employee communications and provide employer support.
→ Wondering if a business owner can participate in their own HRA? Check out our post on owner eligibility and HRAs for more intel.
Which HRA plan is best for your business?
Unlike traditional group insurance plans, choosing and offering an HRA to employees is straightforward.
Take Command offers two HRA plans that will fit any budget: Qualified small employer HRA (QSEHRA) and Individual coverage HRA (ICHRA). Here’s what you need to know to determine which HRA plan is best for your business.
Qualified small employer HRA (QSEHRA)
The qualified small employer HRA (QSEHRA) is made for small businesses with fewer than 50 full-time equivalent employees and works for all W-2 employees regardless of their insurance status.
This is an excellent option for a small business ready to make their first health benefit offering or frustrated by limited options with group plans. A QSEHRA can reimburse employees for insurance premiums, out-of-pocket costs, or both.
What are the benefits of a QSEHRA for small businesses?
Implementing a QSEHRA can unlock several significant benefits for a small business or non-profit compared to other options. Here are some of the benefits and reasons why we love them:
- Optimized benefits
- Tax efficiency
- Flexible design
- Freedom from group health plans
- Budget control
Individual coverage HRA (ICHRA)
The individual coverage HRA (ICHRA) works for employers of all sizes and is a great option if you have a remote workforce with different classes of employees in many states. With the individual coverage HRA, you can divide employees into classes (appropriate for a mixed workforce) to provide appropriate benefits and tax-free reimbursements for each employee type.
Employers may offer an ICHRA as a standalone or alternative health benefit to employees who don’t qualify for your current group health insurance plan. An ICHRA can reimburse employees for qualifying individual health insurance premiums, out-of-pocket costs, or both.
What are the benefits of an ICHRA for your small business?
Implementing an ICHRA gives you recruiting power with benefits offered for a multi-class workforce. If you have different types of employees in various locations, an ICHRA is a great choice. Here are some of the benefits and reasons why we love them:
- Personalized plan options
- Tax efficiency
- Simple and flexible design
- No minimum participation requirements
- Budget control
How do I decide between group coverage and an HRA?
For an employer, deciding between whether to arrange a Health Reimbursement Arrangement or a utilize group insurance can be troublesome.
Both ICHRAs and QSEHRAs give the employee individual options instead of a set plan they would have to be on with a set carrier. With an HRA, there is a defined contribution or allowance that each employee is reimbursed monthly. The employee pays for their premium, and then on a set date is reimbursed. Employees will have to choose a health plan from the Individual Marketplace for coverage. HRAs also can provide reimbursements for dependents as well.
With either QSHERA or ICHRA, you have an allowed 60 days to enroll after being offered your HRA or if you have a Qualified Life Event set by the government.
With Group insurance, you are offered a particular plan or plans that are pre-selected by your employer. This gives little flexibility to the employee should that carrier or plan not provide the care they need. In other words, your employer is paying for the majority of your premium and in hand selects the plan for their company.
A benefit of group insurance is the employer pays a set amount each month and the rest of the premium is deducted out of your paycheck to cover the remainder.
With group insurance, you can generally enroll any time of the year.
→ Compare Group Plans vs HRAs here.
HRA vs HSA
HRA and HSA plans are often confused but are not the same. So what is HRA vs HSA? A Health Savings Account HSA is a special purpose bank account, an official way of saying an account that holds money that may only be used for one purpose – In this case, approved health care costs. Employees and employers may both contribute to an HSA within IRS regulations. Also, there are some tax advantages associated with HSA accounts.
A Health Reimbursement Arrangement is an employer-funded account that works as a holding place for funds available to employees to cover approved medical expenses.
Employees may access the funds by requesting a reimbursement. In addition, employers have the option to restrict the rollover of unused funds each year and the ability to choose between plans that offer slightly different levels of reimbursement (e.g., premiums only vs. premiums with medical expenses.)
Who can offer an HRA?
Employers with any number of employees can offer individual coverage HRA. They need to have one employee that is not a self-employed owner or spouse of the self-employed owner. Health Reimbursement Arrangements are ONLY for employees and not self-employed individuals.
How do you manage an HRA?
The employer who establishes the HRA has the majority of the control over. They decide on how much money goes into the plan, whether it can accumulate and roll over from one year to the next, and what the HRA funds are allowed to be used for eligible expenses.
Also engaging in a HRA company like Take Command can help manage and do all the behind the scene tasks for an employer and employee leaving little for them to worry about.
→ Learn about our HRA administration platform.
There are two main types of HRA plans that we’ll talk about today, and requirements vary between them. ICHRA can be offered by employers of all sizes, while QSEHRA is only available for employers with fewer than 50 full-time employees. The biggest difference is ICHRA’s ability to scale benefits across employee classes (i.e., one set amount to hourly workers and one set amount to salaried, or based on location, full time vs part time, etc).
→ Learn more about ICHRA classes
Also, while employers can offer an ICHRA to one class or type of employees and a group plan to a different type of class of employees. In other words, ICHRA can work alongside a group plan; QSEHRA cannot. In both instances, however, employers can’t offer both ICHRA/QSEHRA and group health insurance to the same classes of employees. QSEHRA doesn’t allow for class options at all, meaning that group plans are off the table. For an employee to receive an ICHRA, they must be enrolled in an individual insurance plan. With QSEHRAs, employees can either get on their own plan or take advantage of the HRA by reimbursing for their spouse’s health insurance premiums.
Understanding some of the basic HRA requirements is critical for employers that are just getting started with these types of accounts, as well as for employees that are trying to navigate the intricacies of healthcare plans. While the HRA setup process is fairly straightforward, becoming familiar with all the ins and outs of the system can take a lot more time. For this reason, it’s important that employers provide their employees with adequate resources for understanding their specific plans and what is and isn’t covered. HRA-eligible expenses typically include prescription drugs and dental and vision services, though these vary somewhat depending on whether the employer chooses to reimburse for medical expenses in addition to health insurance premiums.
Employee FAQs about HRAs
Q: What is HRA in health insurance?
A: An HRA or health reimbursement arrangement is an employer funded health plan from which the employer reimburses the employee, tax free, for qualified premiums and medical expenses at a set dollar amount per year.
For the employees to be reimbursed, they must be enrolled in a health plan through the marketplace.
Employers are responsible for funding and managing the HRA.
Q: If I use my employer’s HRA platform to research and buy an individual (or family) insurance plan and then leave the company, will I lose my insurance?
A: No, you keep the insurance – it goes with you wherever you go as long as you want to maintain that plan. Unlike employer-sponsored group health plans that tie you to the company to maintain health insurance, an HRA allows you to shop the marketplace to secure the best health plan for you that your company reimburses you for as long as you’re employed there.
Q: Do I have to use the HRA my employer offers?
A: There are no participation requirements, and if you decide not to use the HRA it won’t affect the plan for your employer. However, if they offer you an affordable HRA, it may counteract your ability to collect premium tax credits. Ask the Take Command team for more help in the chat on the bottom right hand of the screen.
Q: How do I get money from my HRA account for medical expenses?
A: Since there’s no pre-funding of accounts (like an HSA or FSA) and the HRA is simply an “arrangement” between you and your employer (and not a health reimbursement account), you can’t take funds out. Instead, you’ll submit a receipt for reimbursement for qualified medical expenses, and your employer will pay you back.
The IRS Publication 502 outlines qualified medical expenses. Your employer may reimburse only for health insurance premiums, qualified medical expenses, or both.
Q: How can I use HRA funds?
Health reimbursement funds are used to cover medical premiums and eligible expenses set by your employer. Some of the expenses can include dental, vision, prescriptions, and out of pocket costs.
→ Here's a complete list of which medical expenses are reimbursable with an HRA.
Q: Are HRAs portable?
A: No, they are not.
To clarify, if an employee leaves their job or is terminated the funds remain with the employer. Some employers do allow their terminated employees to access their HRA funds that were accrued while they were employed.
Again, this is strictly decided upon by the employer and is contingent upon which HRA is in play.
As an aside, when dealing with ICHRAs and QSEHRAs specifically, while HRAs are not portable, the health insurance plan is. That means that if an employee loses his job, he doesn't lose his insurance. This is a good thing!
Q: Can I cash out my HRA?
A:No, you cannot.
Unused HRA funds are either rolled over to be used for eligible expenses or retained by your employer. Your employer decides what options they will allow. You cannot withdrawal HRA funds to use for any expense.
Your employer owns the money in the HRA.
→ Read about what happens to unused HRA account funds here.
Q: What can HRA funds be used for?
A: HRA funds can be used to reimburse employees for eligible medical expenses. Eligible expenses may include deductibles, copayments, coinsurance, prescription drugs, and other healthcare expenses not covered by insurance.
Q: Can HRA funds be used to pay for insurance premiums?
A: In certain cases, HRA funds can be used to pay insurance premiums. For example, HRA funds can be used to pay COBRA premiums or premiums for individual health insurance policies purchased through the marketplace.
Q: Can HRA funds be used for over-the-counter (OTC) medications?
A: Yes, as of January 1, 2020, HRA funds can reimburse the cost of OTC medications without a prescription. This change was made as part of the CARES Act.
Q: Can HRA funds be used to pay for health club memberships or fitness equipment?
A: Generally, HRA funds can’t be used to pay for health club memberships or fitness equipment. However, certain types of HRAs, such as wellness HRAs, may allow for reimbursements for some fitness-related expenses.
Q: Can HRA funds be used to pay for cosmetic procedures?
A: No, HRA funds cannot be used to pay for cosmetic procedures that are not medically necessary. However, certain cosmetic procedures, such as reconstructive surgery after a mastectomy, may be eligible for reimbursement.
Q: Can HRA funds be used to pay for alternative therapies, such as acupuncture or chiropractic care?
A: Yes, in many cases, HRA funds can be used to pay for alternative therapies that are considered medically necessary. However, it is important to check with the specific HRA plan to see what alternative therapies are covered.
Q: Can HRA funds be used to pay for medical expenses incurred by family members?
A: Yes, HRA funds can reimburse medical expenses incurred by the employee, their spouse, and their dependents.
A better way to offer employee health benefits
There are many positive benefits to HRA accounts for employers and employees alike.
Let us take this off your plate so you can save time and money while supporting your employees' health and well-being with an HRA for your businesses.
To get started, check out our HRA administration platform demo and find out how this intuitive platform can manage all of your HRA administration.
Here's our guide on How to Set up an HRA if you want some extra reading!
Susanne is a copywriter specializing in the health and wellness industry. Before starting her own business, she spent nearly a decade at a marketing agency doing all of the things – advisor, copywriter, SEO strategist, social media specialist, and project manager. That experience gives her a unique understanding of how the consumer-focused content she writes flows into each marketing piece. Susanne lives in Oklahoma City with her husband and two daughters. She loves being outdoors, exercising and reading.