Small Business

HRA benefits every business owner should know

by Keely S.

We here at Take Command Health are big fans of health reimbursement arrangements (HRAs). They are an awesome, tax-advantaged strategy that allow businesses to afford personalized health benefits for their team. For many businesses, they are superior to the one-size-fits all model of group plans because of the increase in flexibility and customization. Let’s break down some of the key benefits to HRAs, shall we? 

What is an HRA? 

A health reimbursement arrangement (HRA for short) is an alternative benefits solution that allows an employer to reimburse for medical expenses and premiums on a tax-advantaged basis on their own terms. An HRA is not a bank account. This can be a little confusing at first, but it’s actually much simpler. Unlike Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) that are accounts, an HRA is simply an Arrangement. We often get asked if business owners have to pre-fund their account or send money to our account so we can distribute it to their employees. The answer is no to both questions—the money stays with the employer until an employee makes a claim that qualifies for reimbursement. If employees never make claims or don’t claim the full amount, the employer keeps it all!

The reimbursement model (sometimes called a “defined contribution”) gives employers greater ability to control costs and provides employees with more options to choose from. This is very different from the current model of group insurance (sometimes called a “defined benefit”) where employers must choose a plan for the group and employees are limited to options sponsored by the employer.

What are the benefits of health reimbursement arrangements? 

HRAs take the burden of managing a health plan and underlying health risks off of the employer. You or your clients won’t have to hassle with renewals, worry about participation rates, stress about what doctor networks your employees want, or be surprised by annual premium increases. Instead, employers can decide which employees qualify, set their monthly allowances, and get back to managing their business while employees get to choose the plans they want.

HRA key benefits (vs. traditional group health plans)

  1. Transfers employer responsibility for health risks. If you would rather not try to manage employee healthcare spending, know that you can still offer generous benefits and your costs are fixed because you have no risk to manage. Since you are offering a fixed amount per month, there’s no need to spend time & mental energy trying to implement wellness programs & manage your employees’ healthcare spend to control your costs on a traditional group health plan. 
  2. More personalized plan choices for employees. No employee is locked into a plan that might not be a good fit for them. They can also take their plan with them if they leave. 
  3. Simpler and more flexible plan design options. The newer flavors of HRAs have built in design capabilities to custom tailor an HRA to a business's needs. An ICHRA, for example, has eleven classes available for scaling benefits.  With QSEHRA, employers have to treat full-time employees fairly, but there are a lot of levers they can pull on how much to reimburse and who gets to participate.
  4. Greater budget control. You or your clients set the allowable reimbursement rates and your costs will never be greater than that. And if employees don’t buy insurance or don’t use all of their allowance? The employer keeps the money.
  5. No participation concerns. If employees decide not to use the benefit, there is no cost or concern for the plan.

Types of Health Reimbursement Arrangements (HRAs)

The regulations that have historically (and still) govern traditional HRAs come from Tax Code Section 105. Because of this you’ll hear tax geeks and insurance brokers refer to “Section 105 HRAs”.

You’ll also hear people talk about Integrated HRAs and Standalone HRAs. Here’s the difference:

  • Integrated HRAs are “integrated” with a traditional group health insurance plan and used to help reimburse out-of-pocket medical expenses not paid for by the group health plan. Typical examples would be co-pays, co-insurance, deductible payments, etc.
    • One-Person 105 HRAs: These are traditional HRAs integrated with an individual or family health plan.
  • Standalone HRAs are not required to be tied to a group plan. They have a complicated history and can be even more complicated to implement based on tangled federal and state insurance regulations. A few common types that still linger around are:
    • QSEHRAs: A result of the bipartisan 21st Century Cures Act, available since 2017. 
      Important features of this HRA include:
      • For small business with less than 50 employees
      • Reimburses premiums and qualified medical expenses
      • QSEHRA Contribution limits: $5,250 for single employees, $10,600 for families for 2020.
      • Employer can design QSEHRA reimbursements to vary based on age, family size, status
      • Participants must have insurance that meets Minimum Essential Coverage (MEC) to participate
      • All full time employees are eligible to participate
      • Cannot be offered with a group plan
      • Funds roll over year to year as long as total doesn't exceed maximum contributions.
      • For employees eligible for premium tax credits, QSEHRA reimbursements reduce the tax credit dollar for dollar. Unfortunately, employees can't opt-out. 
      • Don't miss a complete list of QSEHRA rules here. 
    • ICHRA (aka the Individual Coverage HRA)—A option for tax-free health reimbursement as a result of President Trump's executive order to expand HRA abilities, expected in January 2020. 
      • Available to businesses of any size
      • Reimburses premiums and qualified medical expenses 
      • No maximum contribution 
      • Participants must have individual insurance or Medicare to participate
      • Participation is at the discretion of the employer based on employee classes. HRA can be designed to reimburse at different rates for different classes. 
      • May be offered with a group plan, but employer can't offer employees in the same class a choice between HRA and group plan.
      • Funds roll over year to year.
      • Employees participating in the HRA aren't eligible for premium tax credits if the ICHRA is considered affordable, but if the amount the employee must pay for a self-only silver plan (the lowest cost silver plan on the exchange) is greater than 9.86% of their household income, the ICHRA is considered "not affordable" and the employee may opt out of the ICHRA and choose the premium tax credit instead. 
  • Spousal HRA—For employees covered by a spouse’s group plan, a Spousal HRA could reimburse medical expenses but not premiums.
  • Retiree HRA—For former employees of a firm, an employer could use a Retiree HRA to help pay for retired members’ insurance premiums and medical expenses.
  • Medicare HRA—For employers with less than 19 employees, employers could elect to reimburse a portion of an employee’s Medicare supplement premiums.

Next Steps

Take Command Health is a recognized leader in QSEHRA administration, ICHRA administration, and small business HRA tax strategy. Is your company or client going to be a part of this exciting employer-based benefits revolution? 

Certain metro areas have prime conditions within their individual insurance markets to adapt this new type of benefits, especially for the newest model, the ICHRA. Here is a ranking of the top ICHRA markets so you can see where you stand. 

Chat with our team with any questions you may have about these new, tax-friendly benefits or check out our new ICHRA Guide for more information on its background, setup process, requirements, and rules.

Picture of Keely S.

Hi, I'm Keely S.! A wife to one and mother to four, Keely does all of the things. She’s also dabbled in personal finance blogging and social media management, contributed to MetroFamily magazine, and is passionate about good food, treasure hunting and upcycling. With a B.S. in Psychology from the University of Oklahoma and a knack for a witty punchline, it’s no surprise that Keely’s social posts are as clever as they get. In her (very little) free time, you’ll find Keely with her nose in a book or trying out a local restaurant with her family.