An HRA account is a health reimbursement arrangements. Wondering how an HRA account works? Overall, HRA accounts are fairly simple — an employer picks an HRA option and sets a budget. Then the employer reimburses an employee for an insurance premium, medical bills, or for a procedure. However, the rules and regulations surrounding HRA accounts can be a little confusing. Here's what to know about HRA accounts.
What is an HRA account?
An HRA Account, sometimes referred to as HRAs, health reimbursement arrangements, or HRA health insurance, is a fundamentally new way of doing health benefits. HRA accounts are based on employers reimbursing their employees for health insurance rather than buying it for them.
Health insurance reimbursement is not taxable through an HRA. This is one of the many reasons we love HRAs!
→ Wondering if an HRA is health insurance?
How do HRA accounts work?
The way an HRA account works is fairly simple. First, the business owner decides on a monthly reimbursement budget that works for them. Then, employees purchase a plan that is best for their family. After that, they employee gets reimbursed on their paycheck.
→ Learn more about how health reimbursement plans work.
→ Learn more about how an HRA is funded.
→ Check out our post on HRA account pros and cons.
HRA accounts bring portability and choice to employees and cost control and predictability for employers. No more risk, no more renewal hikes, no more participation worries.
Types of HRA accounts
We mentioned briefly how health insurance reimbursement works, and the mechanics are similar for both of the latest and greatest HRAs; the qualified small employer health reimbursement arrangement, and the individual coverage health reimbursement arrangement. Employers and employees need to be aware that some HRA account rules and guidelines can vary depending on the type of HRA provided.
QSEHRA - the qualified small employer HRA works for businesses with less than 50 employees that do not offer a group plan. The QSEHRA has a monthly contribution limit, which typically increases from year to year.
ICHRA - the individual coverage HRA allows for tax-free reimbursement of benefits for any size business and for any amount (no contribution limits!).
→ Learn more about HRA account rules.
HRA account rules to know
- Owner eligibility rules: Whether or not self-employed owners can participate in an HRA depends on how the plan and business are set up! In order for a business owner to participate in a QSEHRA, they must be considered an employee of the business. Since C-corps are legally separate from their owners, a business owner and dependents can utilize the QSEHRA. Since S-corp owners are not employees, they typically cannot participate in a QSEHRA. Partners and sole proprietors can participate under certain loopholes — if a partner or sole proprietor’s spouse is a W-2 employee, then the partner or sole proprietor can participate in the HRA as a dependent of the spouse.
- Class eligibility rules: HRAs must be offered equally and fairly to all employees, but the way QSEHRA and ICHRA approach this is different. While QSEHRA eligibility can only be scaled based on family size or age, ICHRA offers a greater deal of efficiency with its class feature, which allows employers to divide employees up into an almost limitless amount of custom classes that receive varying rates of reimbursement. Employers can offer ICHRAs to all eligible employees, or to only certain classes of employees. In general, individual classes are determined by job-based criteria such as salaried or non-salaried, non-resident aliens, seasonal employees, etc. One rule that stands out here is that while ICHRA can be offered to one class and a group plan offered to another, an individual cannot be offered both.
- Qualified plan rules: The point of the HRA is to afford flexibility to both employers and employees; however, one type of choice is off-limits — an employer cannot offer the same class of employees a choice between a traditional group health plan and an ICHRA. If an employer does want to provide group plan coverage to one type of employee and an ICHRA to another type, there are some size requirements for certain classes of employees. Employers also need to make sure that plans meet basic coverage requirements: There are specific rules for qualified health plans that integrate with ICHRAs and minimum essential coverage plans for QSEHRA.
- Employee usability rules: In order to use the individual coverage HRA amount, employees must be enrolled in individual health insurance coverage — either by purchasing a plan through the ACA marketplace or through a private insurance company, or through Medicare.
- Management/privacy rules: Employers are strongly advised not to manage their own HRA plan, due to federal privacy requirements. Of course, employers have to verify that employees are using funds to pay for health insurance and medical expenses — but having employees submit receipts risks fines for HIPAA violations. It’s best for employers to place administration of plans into someone else’s hands. Luckily, there are HRA administration tools available.
→ Learn what to look for in an HRA Administrator.
Take Command: your HRA account expert
Take Command is a recognized leader in QSEHRA and ICHRA administration and small business HRA tax strategy. If it’s not obvious, our team is passionate about HRAs and the impact they can have on businesses of all sizes.
Chat with our team with any questions you may have about these new, tax-friendly benefits!
