What is a health reimbursement arrangement?
A health reimbursement arrangement is a tax-advantaged benefits solution that allows employers to reimburse their employees for qualified health costs or individual insurance premiums. It's also commonly called HRA health plans, HRA insurance, HRA healthcare, or HRA health insurance. Don't sweat it! We're talking about the same thing.
Traditional group health insurance plans are complex, overpriced, and rigid. Not to mention, it's challenging to find the right plan that fits all of your employee's health care needs. For many employers, a Health Reimbursement Arrangement (HRA) is an excellent alternative to group plans.
Note: This HRA Guide was originally published in 2022 and has been updated for 2023.
What does HRA stand for?
An HRA stands for Health Reimbursement Arrangement.
HRAs, sometimes referred to as Health Reimbursement Accounts or HRA health plans, give power back to the employee by allowing them to make healthcare decisions right for them. Plus, it alleviates the hassle for the employer to administer a group plan. HRAs are game-changers in the employer health benefits world.
Health reimbursement arrangements are appealing to both employers and employees for many reasons. Here are a few of the advantages HRAs have compared to traditional group insurance:
- Employee Choice. Employees get to choose an individual insurance plan that meets their needs. They may also be reimbursed for out-of-pocket health care expenses.
- No Pre-Funding Accounts. No more upfront costs. With an HRA, the employer sets the allowance, and reimbursement payments aren't made until qualified claims are approved.
- Fixed Dollar Amounts. No annual premium raises on group insurance plans.
- No Participation Requirements. If employees decide not to use the benefit, it doesn't impact the HRA plan.
- Tax Advantages. Employees get reimbursements tax-free. Employers can deduct the reimbursements from taxes. Plus, there is no payroll tax on the amount.
Types of HRAs
There are several types of HRAs for employers to consider in 2023. Take Command specializes in the two most common arrangements: ICHRA and QSEHRA.
ICHRA stands for Individual Coverage Health Reimbursement Arrangement. We pronounce it “ick-rah”. This HRA type allows employers of all sizes to reimburse their employees for their individual health insurance premiums and other qualified medical expenses.
QSEHRA stands for Qualified Small Employer Health Reimbursement Arrangement. We pronounce it “Q-Sarah”. This HRA type is for small businesses and nonprofits with less than 50 full-time employees. It allows employers to reimburse their employees for qualified healthcare expenses outlined by the IRS and/or individual health insurance premiums.
Other HRA Types:
- One-Person 105 HRAs are designed for small business owners who need to provide benefits to one person. This can sometimes be a spouse who is active in the company or a self-employed business owner.
- Excepted Benefit HRAs (EBHRA) are used to pay for additional medical expenses like vision, dental, coinsurance, and copayments. It’s capped by the IRS and must be offered in addition to a group health insurance benefit. Read our post on EBHRAs.
- 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. An excepted benefit HRA is a type of Integrated HRA.
- Traditional HRAs are used to cover medical expenses but can’t be used to cover insurance premiums.
- 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.
QSEHRAs and ICHRAs are actually new types of standalone HRAs, but a few other types that still linger around are:
- 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.
Let's talk a bit about how HRAs came to be.
Health Reimbursement Arrangements were commonly used before the Affordable Care Act was passed in 2010. The complexity of the bill and its regulations essentially brought an end to reimbursements by employers.
Then in 2016, the 21st Century Cures Act was passed and created the QSEHRA giving small businesses the ability to reimburse for individual insurance or out-of-pocket health care expenses. The creation of the QSEHRA gave small businesses a tax-savvy way to offer health benefits to their employees. This is important because small businesses or organizations may not have the buying power for a larger group health insurance plan.
Then, in 2019, new regulations came down from the U.S. government to expand HRAs. The ICHRA was born, allowing employers of any size to offer health reimbursement arrangements.
With the inception of ICHRA, employers are able to offer an affordable health care solution to their employees and give their employees the chance to choose the coverage that is best for them.
How does an HRA plan work?
How HRAs work is super simple.
The employee pays for health care expenses or individual health insurance premiums, and the employer reimburses them. In order to reimburse employees for health insurance tax-free, a health reimbursement arrangement must be established. The simplicity of this arrangement allows the employee to take control of their healthcare costs by choosing where to spend their dollars and price shopping around to find the best value for the healthcare they need. It also allows the employer to offer healthcare benefits that best fit their employee's needs and the company's budget.
Easy as 1, 2, 3:
- The employer designs the plan (preferably with an experienced partner like Take Command). Then they set the reimbursement limits.
- The employee purchases their qualified healthcare or insurance plan and submits a claim for reimbursement.
- The employer reimburses the employee for a qualified claim.
Are health reimbursement accounts considered income?
As we mentioned, the reimbursements made to the employees are tax-free. This is because the IRS doesn't consider these reimbursements income. Employer-issued reimbursements are also exempt from federal income and payroll taxes.
Are HRAs the same as health insurance?
No, an HRA health reimbursement arrangement doesn't act the same as health insurance. For most HRAs, the employee is required to have health insurance from the individual marketplace or sometimes, a spousal or parents' employer's insurance. The HRA may reimburse the employee for their health insurance premiums.
How are HRA funds used?
You’re probably asking yourself, what are qualified medical expenses? The IRS Publication 502 outlines qualified medical expenses; however, the employer may decide to reimburse only for health insurance premiums, or for qualified medical expenses in addition to health insurance premiums. Slightly more than half of our clients choose to reimburse for both.
What is HRA insurance?
HRA insurance refers to the types of plans that can be integrated with each type of HRA. At a high level, this means ACA-compliant, high quality health plans. The easy way to see if they will be compliant is if they have a metal tier associated with the name.
What is the difference between HRAs vs HSAs?
HRAs are often confused with HSAs. It's easy to see how. They have similar acronyms and they are both intended to help with healthcare costs. However, these two function very differently.
HRAs, as mentioned earlier, are sometimes referred to as Health Reimbursement Accounts. But they don't have an account for employees to make withdrawals or deposits. It's a reimbursement arrangement between the employer and employee.
HSAs are Health Savings Accounts, similar to a personal savings account, but the money here is used solely for healthcare costs. The account is owned by the individual employee and they can deposit funds or withdraw funds for health-related expenses.
Are HRA accounts use it or lose it?
Not quite. The government doesn’t specify any use it or lose it policy. It’s up to the employer to decide if funds roll over to the next year or not. It’s important for the employee to understand their employer's policy to be sure they are utilizing the HRA correctly.
What happened to unused funds? Do HRAs roll over?
That’s up to the employer. When they design the HRA, they determine if unused funds are forfeited or if they can roll over to the following year.
What are the benefits of HRAs?
HRAs like ICHRA and QSERA are changing the game of employer-sponsored healthcare benefits. These arrangements encourage consumer-driven healthcare meaning the employee is in the driver's seat.
Are HRAs good for employers?
For employers, HRAs can be a great alternative to traditional group benefits. So great, they have us saying no more!
- No more pricey renewals.
- No more paying for things your employees don’t want or use.
- No more group participation requirements.
- No more taking on risk.
What is proof of coverage for an HRA?
Proof of coverage ensures that each employee getting reimbursed for medical premiums has high quality, ACA compliant health insurance. It's a critical step in our set up process. To receive reimbursements through the HRA, employees must submit documentation like a monthly bill, an email confirmation, or an ID card.
Do employees have to show proof of coverage every month?
Thankfully, no. Take Command sets up a recurring premium that automates this process. Reports are then sent to employers monthly.
What happens if employees submitted a receipt that's above their monthly allowance?
If an employee submits a receipt that is more than their monthly HRA allowance, it will be reimbursed throughout the year.
What happens to leftover HRA funds?
HRA funds do not rollover unless specified by the employer.
What happens to HRA funds if an employee leaves or is terminated?
If an employee leaves the company, HRA funds stay with the employer, but the employee's health plan will stay with the employee, helping them avoid costly COBRA or lapses in coverage.
Can an employee's spouse's group insurance be reimbursed?
It depends on the type of HRA. With ICHRA, the rules do not allow for employees to consider getting on their spouse’s group plan (if offered by the spouse’s employer). However, a QSEHRA works great with employees on their spouse’s group plan.
Can you have HRAs and premium tax credits?
An HRA will offset your tax credits dollar for dollar if you have a QSEHRA. With an ICHRA, it comes down to the affordability of the HRA. If it's considered affordable, employees take the HRA. If it's above the affordability threshold, employees can choose what's best for them.
Who funds an HRA?
HRAs are solely funded by employers. Employees cannot add funds.
Are HRA accounts pre-funded?
The great thing about HRA accounts is that they are not actually pre-funded. Since it's a reimbursement arrangement, it means that once a qualified expense has been incurred, the employer reimburses the employee.
Here are some other HRA benefits for employers:
- Set Budget: The employer sets the reimbursement budget. This allows for greater cash flow and no unexpected premium hikes.
- Flexibility: The employer is able to design a plan that fits the needs of their employees. With an ICHRA, the employer can set different rates based on job criteria, geography, etc. QSEHRA has to be offered equally across all employees but can offer flexibility based on family size.
- Tax Advantage: Reimbursements aren’t subjected to payroll taxes and can be used as a deduction.
Are HRAs good for employees?
For employees, HRA health reimbursement arrangements offer flexibility to choose healthcare coverage that fits their individual needs. They allow employees to drive the decisions.
Here are the other health reimbursement arrangement benefits for employees:
- Choice: Employees are able to visit their preferred provider or choose the healthcare plan they want.
- Keep Your Plan: If the employee switches jobs, they get to keep their health insurance plan.
- Customer Service: When individuals buy insurance, many times they get a better customer experience. Some insurance companies have special apps and services that many times aren’t part of the group insurance experience.
- Tax Advantage: Reimbursements are not income and aren’t subject to taxes.
What is a disadvantage of an HRA?
At Take Command, we firmly believe the HRAs are superior to traditional group health insurance but we understand they might not be a great fit for everyone. There are a few things to consider before switching to an HRA.
- Funds don’t transfer with the employee. If the employee leaves the company, the reimbursement funds stay with the employer.
- The QSEHRA has contribution limits set by the IRS that may limit the funds that can be reimbursed.
- If individual insurance markets in your employees' area are weak, they won’t have many options to choose from.
- If your team has a group plan and they like it, they might be hesitant to make the switch.
- If employees qualify for premium tax credit on the individual market, you may need to calculate the HRAs affordability to understand if it’s a benefit to your employees.
HRA Rules 101
Some rules vary depending on the type of arrangement ICHRA vs. QSEHRA. But the rule that is front and center is fairness. To prevent discrimination, an employer can’t decide on reimbursements for individual employees. For example, with the QSEHRA, if an employer decides to only reimburse prescriptions that apply to all employees.
Here are some other rules:
Reimbursements are outlined by the IRS Publication 502.
Depending on the HRA, employees may need to buy health insurance.
Only the employer can put money into the HRA. It may not be funded by a salary reduction of the employee.
QSEHRA reimbursement amounts are limited by the IRA.
The requirements to incorporate an HRA vary depending on the type.
|No size restrictions. Employers of all sizes can offer an ICHRA.||Only employers with less than 50 full-time employees can offer a QSEHRA. Defined in IRS section 480H9(c)2.|
|No group health plan. While employers can offer both group health insurance and an ICHRA, they can’t offer them to the same class of employees. For example, an employer may choose to offer a group plan to full-time employees and an ICHRA to part-time employees.||No group health plan. Unlike the ICHRA, the QSEHRA doesn’t offer class options (employee hours, geography, etc.). This means that the employer can’t offer any group health insurance plans.|
HRAs are for employees. The intention behind HRAs are similar to group health insurance, meaning they are an employer-sponsored benefit to cover healthcare costs.
Are business owners eligible for an HRA?
Maybe. For the business owner to participate in the HRA, the owner needs to be an employee. This is often determined by the corporate structure of the business.
Which employees are eligible for an HRA?
HRAs can be offered to any employee or certain types of employees based on job criteria as long as each class is treated equally. For ICHRAs, the employee has to have a qualified individual insurance plan. With the QSEHRA, the employee can be covered by a spouse’s insurance plan or purchase a qualified individual insurance plan. In both cases, they must have health insurance to participate and cannot be offered a group plan at the same time.
HRA Health Insurance 101
Qualified Health Plans and ICHRA
- Bronze, Silver, and Gold medical plans purchased on the exchange.
- Medicare Part A+B or Part C
- Catastrophic Plans (limited to those under 30 or qualify for hardship exemption)
- Student Health Insurance Plans
- No spouse plans or parental plans qualified for ICHRA reimbursements.
Qualified Health Plans and QSEHRA
- Any plan that meets the Minimum Essential Coverage as outlined by the IRS in Section 106(g)
- Bronze, Silver, and Gold medical plans purchased on the exchange.
- Medicare, Medicaid, CHIP
- Catastrophic Plans (limited to those under 30 or qualify for hardship exemption)
- Student Health Insurance Plans
- Spouse’s Health Insurance Plan
- Parent’s Health Insurance Plan
- Sharing Ministry Plans
- Short-term Plans
- Indemnity Plans
The Affordable Care Act (ACA) requires employers with more than 50 full-time employees to provide affordable health insurance. Affordability is defined as the cost of health insurance can’t be more than 9.83% of the employee’s household income.
Insurance isn't required for employers with less than 50 full-time employees, but affordability is still important as it impacts employees' ability to qualify for the premium tax credit.
To calculate affordability, we need to look at the lowest-cost silver plan on the marketplace exchange. An affordable HRA contribution must be greater than that silver plan minus 9.83% times the employee’s household income.
Clear as mud, right? To learn more about affordability, visit our affordability calculator.
Since QSEHRAs are only available for employers with less than 50 full-time employees, it doesn’t fall under the affordability guidelines by the healthcare mandate. But as we mentioned, it’s important to understand affordability as it impacts employees ability to qualify for the premium tax credit.
An HRA administrator assists with the design and management of the arrangement. It’s necessary to have a third-party administrator for several reasons, the biggest being privacy.
What is an HRA administrator?
Since an HRA health reimbursement arrangement is reimbursing medical expenses to substantiate their claim, it needs to be validated with receipts. Under the Health Insurance Portability and Accountability Act (HIPAA), employees' medical expenses including individual health insurance premiums are considered Protected Health Information (PHI). An administrator can provide compliant administration of an HRA. In addition to HIPPA compliance, an administrator can ensure compliance with the IRA. Since HRAs are considered a tax advantage, the IRS requires businesses to keep records for up to seven years.
84% of Take Command's clients spend less than an hour per month administering their HRA.
How to choose an HRA administrator
Choosing an HRA administrator is an important decision. As mentioned above, employers need to ensure they are compliant with their HRA. A good administrator needs to ensure compliance and reporting.
1. Process, Compliance, and Reporting
- Legal Plan Documentation and Plan Summaries
- Employee MEC Verification
- Tax Reporting
- IRS Deadlines
- Year-end W2 Reporting
Form 720 (PCORTF)
- COBRA Administration (if not exempt)
- HIPAA and PHI Compliance
- Process to substantiate employee claims
- Reimbursement mechanism
2. Employee Communication
Like any healthcare coverage change, it’s important to effectively communicate with your employees. When considering an administrator, take into account their change management plan.
Provide communication materials for employees and robust onboarding process
Employee support while shopping individual health insurance plan
Easy to use platform to request reimbursements
3. Employer Support
Compliance and legalese aren’t the only things employers need support. The employer needs a quick, easy signup process and a dashboard to view updates and information on the HRAs.
Is an HRA a good idea for my business?
HRAs can have a positive impact on your business. Here are a few questions to consider.
- Are you facing a large renewal fee on group insurance? This is a big one for employers. The cost of group insurance keeps going up. To help control costs and ensure your employees aren’t paying things they don’t need, HRAs are a great alternative to traditional group health insurance.
- Are you hoping to help your employees (even if you don’t have to)? The job market is competitive and offering benefits can be a great recruitment and retention tool. Plus, we know employers want to help their employees. HRAs provide employers with the option to provide a health benefit without breaking the bank.
- How are individual insurance rates in your area? Understanding the individual insurance market in your areas is important. If the rates are not great, employees are going to have few choices for insurance coverage.
- How will you manage the switch? Whether you’re switching from a group insurance or offering a new health benefit, it’s important to have a plan in place to manage the change. Make sure you understand the fine print and communicate to employees.
How to set up an HRA
Ready to get started with an HRA? Setting up an HRA is easy, especially if you have a skilled administrator like Take Command. Now, that you have read through the basics of HRAs, here are the basic steps for setting it up.
1. Pick an HRA Type
An employer will choose a plan that best fits the organization depending on several factors. For example, a QSEHRA is only available for employers with less than 50 full-time employees. An ICHRA can scale for any size of employer.
2. Select a Start Date
Once an employer decides to offer an HRA, they just need to pick a start date. They don’t have to be tired to open enrollment. The implementation triggers a special enrollment period so employees can find plans on the individual market outside of open enrollment dates.
3. Design the Plan
To design the HRA plan, the employer will need to determine eligible employees. For an ICHRA, the employer will need to set up classes based on employee types like employment status or geography. Then the employer will determine the allowance for each class. For both ICHRA and QSEHRA, allowances may also be based on age or the number of dependents.
4. Draft Legal Documents
Like any benefits offering, there needs to be an established legal plan that includes formal plans and a summary plan description that includes HRA policies, reimbursement amounts, and structure. This is important since failure to comply with the IRS and Department of Labor rules will result in hefty penalties.
5. Educate Employees
Employees must know how to use the HRA. From the reimbursement process to how premium tax credits work with the HRA, there is a lot of ground to cover. Educating the employees on how it works can be a daunting process, but with Take Command, we help with the ins and outs of the new HRA.
6. Assist with Getting Insurance
Since employees will likely be getting individual insurance from the marketplace, it’s important to offer support in this arena. While federal rules prohibit employers from being involved in the actual decisions-making for provider or policy, the employer can provide additional decision-making tools and information through the complicated process.
The most common questions we hear.
If I have less than 50 employees, can I still have an ICHRA?
Yes. ICHRAs are for employers of any size.
Do HRAs earn interest?
No. The employer keeps the money until they need to fund reimbursements. This allows for consistent cash flow.
Can an employee use an HRA if they have health insurance?
Yes. HRAs are designed to cover expenses that aren’t covered in your health plan. It may also be used to pay for individual health insurance coverage.
What if the reimbursement amount is larger than the allowance?
If the claim is larger than the budgeted allowance, the employee will be reimbursed for the allowance. However, the reimbursements can be made over a few months to cover the costs.
Who finances a health reimbursement arrangement or funds an HRA?
HRAs are arrangements, not accounts, so technically, there is no pre-funding of accounts ahead of expenses. Since they are considered employer sponsored health benefits, the reimbursements come from the employer, and an employee cannot contribute.
Is a health reimbursement arrangement the same as an HSA?
No, an HRA is not the same as an HSA. But we understand the confusion! Both Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs) are tax-advantaged tools that help individuals pay for out-of-pocket medical expenses for themselves and their families through set-aside funds.
Are health reimbursement arrangements taxable?
Great question! The answer is no. Reimbursements aren't subject to payroll taxes, employer taxes, or income taxes.
Is an HRA a good plan?
Well that depends. It's a great plan if your employees live in an area with a thriving individual health insurance market with lots of options. If you live in an area with few individual insurance options, your employees might wish they had more options.
It's also a good plan if you are an employer looking to control costs while still offering a valuable, personalized benefit.
What qualifies under HRA reimbursement?
Qualified medical expenses as well as health plans purchased on Healthcare.gov or state exchanges (or our website) qualify for reimbursement.
Can I take money out of my HRA account?
Since there is no pre-funding of accounts and it's simply an "arrangement," you cannot take funds out of your account. If you've incurred a qualified medical expenses, you can submit a receipt for reimbursement.
Can you use an HRA for gym membership?
Sadly, no. A gym membership is not considered a qualified medical expense. Wouldn't that be amazing?
Disclaimer: We’re licensed health insurance agents, HRA plan administrators, and experienced HRA practitioners, but we are not licensed tax professionals—please don’t treat our advice as such. Practical knowledge and links to relevant IRS regulations and legal resources are provided throughout this guide.