An HRA stands for health reimbursement arrangement and is an umbrella term for any arrangement between an employer and their employees to reimburse for medical expenses and/or insurance premiums on a tax-free basis. The purpose is for employers to help their employees afford rising healthcare costs.
But there's so much more to know about HRAs! Let's dig in to 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.
What is an HRA?
HRAs, "Health Reimbursement Arrangements," or medical reimbursement plans, 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.
Tax Code Section 105 in the Internal Revenue Code is the regulations that cover this type of tax-friendly tool. That's why you'll hear industry folks toss around the term "Section 105 HRAs." That's where that comes from.
An important distinction is that HRAs are not accurately described as health reimbursement accounts. An account suggests pre-funding, whereas an arrangement simple means an employer will reimburse their employees once a health care expense has been incurred. As well, these are different although reminiscent of the flexible spending account FSA or health savings account HSA since they are all considered tax advantaged accounts.
How an HRA works
The mechanics of a health reimbursement arrangement HRA are pretty simple. An employer chooses an HRA plan for his company, sets a budget that works for them, and then lets the employers know they can use it. From there, once an employee pays for a qualifying medical expense or premium (medical, dental and vision), they just turn in the receipt and submit for reimbursement within the plan year to access their HRA funds.
If employees want a high deductible health plan, they can choose that! If they want to keep their doctors in network, they can choose that too. The point is, the employee does what's best for them.
Easy as pie.
Now let's move on to the types of HRAs. This is where things start getting complicated.
→ Read about what happens to unused HRA account funds here.
→ Learn about the HRA IRS rules.
→ Learn about Health Reimbursement Arrangement Rules for ICHRA and QSEHRA.
Types of HRAs
There are several types of HRAs that business owners to offer benefits to their team. Our small business tax strategy HRA guide can help direct you to the best one for your business.
- 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.
- ICHRA—Available as of January 1, 2020, the individual coverage HRA ICHRA allows for tax-free reimbursement of individual health insurance premiums and qualified medical expenses for any size business and for any amount, even if the company is more than 50 full time equivalent employees.
- EBHRA—Excepted Benefit HRAs are limited to paying for excepted benefits, like premiums for vision and dental coverage or similar benefits exempt from ACA and other legal requirements. These HRAs are only permitted if employees are offered coverage under a group health plan sponsored by the employer. Along with ICHRA, these two HRAs are the new kids on the block (and we think they are going to change the employer-sponsored benefits market in a big way!).
- 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:
- Qualified Small Employer HRA—For businesses with less than 50 employees that do not offer a group plan, business owners can set up a QSEHRA for their team to help pay for benefits tax-free. Unlike the other standalone HRAs in this list, this small business HRA was created by the 21st Century Cures Act back in 2017 and signed into law by President Obama. We believe QSEHRA supersedes the following standalone HRA options in about 99% of situations.
- 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.
→ Wondering if health insurance reimbursement is taxed as income?
→ Check out this post on one of the stickiest questions we get: how do premium tax credits work with ICHRA and QSEHRA?
Which HRA is right for my business?
Need help sorting through the details of your HRA options and finding the right one for you? Our team of experts are on hand to help. Just chat with us on our website, or check out one of our helpful guides on our favorite HRAs, like our HRA Guide, our ICHRA Guide and QSEHRA Guide.
→ Check out our top 5 Health Reimbursement Arrangement rules to remember here.
→ Learn more about how health reimbursement plans work.
