A health reimbursement arrangement, or HRA for short, refers to an arrangement between employers and their employees to reimburse for medical expenses and/or insurance premiums tax-free. The purpose is for employers to help their employees afford rising healthcare costs. Perhaps that clues you into the HRA meaning, but we want to dive into the details of HRAs so you can understand how they could benefit your business and how they're paving the way for a shift in the way we think about employer-sponsored benefits.
While they've been around for a while, HRAs are gaining traction recently among businesses of all sizes due to regulatory rule changes that make them more accessible, flexible and easy to use. An alternative to traditional group plans, these 401(K) style benefits put the power in the employees' hands, shifting the risk from the employer and offering more personalization and choice for workers. There are also an effective recruitment and retention strategy.
What an HRA means for employers
HRAs are not super complicated or scary, but they are built on a series of regulations to make sure they are being offered fairly and are achieving their intended aim, which is to help employees pay for benefits tax-free. The regulations also do their best to prevent the reimbursements from being used for unfair things, like executive compensation, fraud, discrimination, money laundering, etc.
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 Health!) so you don't have to worry about things like compliance or forms during tax time.
What an HRA means for employees
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.
How HRAs work
An HRA is pretty straight-forward: 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 then reimbursed when they submit a claim. This post goes into more detail about each step of the process.
There are several HRAs available today, but the two major types of HRAs that business owners should know about are relatively new to the market. They are ICHRA (individual coverage HRA), 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. These are the only HRAs that allow employers to reimburse for health insurance premiums and qualified medical expenses.
Here's a few other things to note:
- 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 free for both employee and employer
Ready to get started?
Take Command Health’s small business tax strategy HRA guide can help direct you to the best one for your business. We’ve compiled answers to some of the most common HRA questions from employees. We are ready to chat on our website if you have any specific questions about your business and how HRAs could help. Setting up a small business HRA is simple and quick, and our team is here to help if you need it.
We are so excited about these HRAs and all the benefits they offer, that we wrote comprehensive, in-depth guides to the ins and outs of both.