If you don’t know already, HRA stands for health reimbursement arrangement. HRAs allow an employer to reimburse for qualified medical expenses and/or insurance premiums on a tax-free basis. Under this arrangement, employees purchase their own health insurance on the open market and then submit claims to their employer to get reimbursed for the cost of their premium and if allowed, all qualified medical expenses. Let’s look more closely at the Health Reimbursement Arrangement and how it all works.
HRA health reimbursement arrangement: a crash course
An HRA is a tax advantaged account built on a series of regulations that helps to ensure it is being offered fairly and achieving its intended aim, which is to help employees pay for benefits tax-free. While they used to be common practice, in more recent years, many business owners wonder if there's a tax deduction involved or if health insurance reimbursement was taxable.
→ More on what HRA stands for
While it wasn't possible before, we are happy to say that it's possible (and legal!) now!
A health reimbursement arrangement HRA works pretty much exactly how it sounds: the employer reimburses for premiums and medical expenses on a tax-free basis, and the employee chooses a plan that fits their needs. Employees are reimbursed when they submit a claim for out of pocket medical expenses. While they are different than flexible spending accounts (FSA) or health savings accounts (HSAs), they can be used to purchase a high deductible health plan (HDHP) if that's what the employee deems best for them. Employees will appreciate the freedom and choice that comes with HRAs vs group health plans.
→ Here’s even more info about how HRAs work!
→ Here's what happens to unused HRA funds.
→ Learn about the HRA IRS rules.
→ Learn about Health Reimbursement Arrangement Rules for ICHRA and QSEHRA.
There are several health reimbursement arrangement HRA available today, but there are two major types of HRAs that business owners should know about. They are ICHRA (individual coverage HRA ICHRA), 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.
Here’s what you need to know about the HRA types.
Our small business tax strategy HRA guide can help direct you to the best one for your business.
HRA benefits
There are many benefits of a health reimbursement arrangement, especially when you compare them to traditional group health insurance.
- Funded entirely by Employer (no employee contributions)
- Account owned by Employer- funds stay with employer if employee leaves company
- Reimburses health insurance premiums and medical expenses
- Money is reimbursed for expenses/premiums after they are incurred and receipts are provided
- Employees must have health insurance (minimum essential coverage) to participate
- Tax benefits: Tax free for both employee and employer (as opposed to health insurance stipends).
- Some types of HRAs don't have an annual contribution limit
→ Wondering if an HRA is health insurance?
HRA: what it means for the employee
If you're an employee and your boss is offering you an HRA, it means that they are going to reimburse you for health insurance costs and possibly medical expenses depending on the type of HRA they have chosen. This is great news because it means you can shop for the best plan that fits your needs (you know you want to keep your doctor in network!), and you submit receipts and get reimbursed. This is an alternative to a group plan and means personalized plan choice and portability for you.
Pro tip: Before you sign on the dotted line for a new health plan, make sure you study up on HRA compliant plans.
HRA: what it means for the employer
An HRA allows you to set aside a fixed amount of money each month that employees can use to purchase individual health insurance or use on medical expenses, tax-free. This means employers get to offer benefits in a tax-efficient manner without the hassle or headache of administering a traditional group plan and employees can choose the plan they want.
The mechanics of an HRA are pretty simple. You choose a monthly budget that works for you, your employee signs up for a health plan that works for them, then you outsource the rest to an HRA administrator (like Take Command!) so you don't have to worry about things like compliance or forms during tax time.
HRAs and Take Command- a perfect match
We believe that HRAs empower employees to be their own advocate when it comes to their healthcare spend. That's an important piece of the puzzle as we try to fix the high costs of healthcare.
If you think an HRA might work for your business, don't hesitate to reach out to our HRA experts or read through our new HRA Guide. We are around to chat on our website and would be happy to help you.
→ See if the HRA insurance model is for you!
