HRA account rules are an important step in understanding Health Reimbursement Arrangements. On the face of it, HRAs are fairly simple — an employer picks an HRA option and sets a budget. When an employee pays for a premium or has a medical bill for a procedure, the employer reimburses them. But the rules surrounding HRA accounts can be a little confusing. Here are some rules for the road.
Employers and employees need to be aware of some HRA account rules and guidelines, however, which can vary depending on the type of HRA provided. Two new options, the Qualified Small Employer HRA (QSEHRA) and Individual Coverage HRA (ICHRA), also have their own, more specific guidelines. Take Command Health’s small business tax strategy HRA guide can help direct you to the best one for your business.
Before we jump into HRA account rules, let's have a quick recap of the types of HRAs we are talking about.
- Integrated HRAs work with a traditional group health insurance plan to reimburse out-of-pocket medical expenses, and are typically coupled with co-pays, co-insurance and deductibles. ICHRAs are very flexible as to group size; EBHRAs pay for non-medical or exempt benefits such as vision or dental, long-term care or COBRA extensions.
- Standalone HRAs like QSEHRAs (established in 2017) can help teams of fewer than 50 who do not have an option of a group plan pay for benefits tax-free. Spousal, retiree and Medicare HRAs can help bridge or reimburse some benefits.
HRA account rules for QSEHRA and ICHRA
- Company size: Generally, any sized employer can offer an HRA. While ICHRAs are available to employers of any size, the predecessor, QSEHRA, is intended only for companies with fewer than 50 employees who would not previously have been required to offer health insurance.
- Contribution limits: ICHRA is not subject to any contribution limit in terms of reimbursement rates, but QSEHRA has a cap, which increased quite a bit for 2020. An individual can have $437.50/month or $5,250/year; a family can have $883.33/month or $10,600/year.
- Owner eligibility: 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: 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. There are some special rules, but 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.
- Determining affordability for tax credits: An ICHRA is considered affordable for an employee if the amount of the premium an employee pays out-of-pocket for the Silver marketplace benchmark plan is less than 9.78% of the employee’s household income for 2020 plans. For 2021 ICHRA affordability, that percentage raises to 9.83%. If the offer is affordable, the employee is not eligible for the premium tax credit for Marketplace coverage; if it is not affordable, the employee must opt out of the ICHRA in order to claim the tax credit.
- Employee choices: 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: 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.
- Start dates: Both QSEHRA and ICHRA can be initiated at any time. A recent regulatory change this past January now allows individuals offered a QSEHRA to qualify for a Special Enrollment Period. ICHRAs also trigger Special Enrollment Periods, which means that employees will have a much easier time finding a plan on the individual insurance market than having to wait around for open enrollment.
- Reimbursements: HRAs need to be set up as a formal health plan under IRS and ACA guidelines. Employers cannot casually reimburse or expense out medical costs — otherwise, they could face fines. Using an ICHRA or QSEHRA administration tool will keep you out of trouble and both HRAs will lend tax-advantages to help save on benefit costs.
- Health savings account interaction: HRAs and HSAs, which are funded both by the employee and the employer, can be used together, but there are several account rules. An ICHRA has to be set up to reimburse only premiums in order for the employee to make contributions to their HSA — an employee cannot “double dip” by using the HSA and employer reimbursements to pay for medical procedures. Employees can opt into that set up on an ICHRA; for QSEHRA, an employer has to offer that to setup to all of his employees or to none of them. The IRS also determines the criteria for HDHP plans that offer HSAs.
- Management: 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.
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