HRA Guide: An Overview of Health Reimbursement Arrangements

Take control of how you pay for employee health benefits with tax-friendly HRAs.

Contents

An HRA 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 an HRA health plan, health reimbursement account, 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 healthcare needs. For many employers, a Health Reimbursement Arrangement (HRA) is an excellent alternative to group plans.

HRAs give power back to the employees by allowing them to make healthcare decisions that are right for them. Plus, they alleviate the hassle of the employer administering a group plan. HRAs are game-changers in the world of health benefits for employers.

HRA History

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 ended employers’ reimbursements.

Then, in 2016, the 21st Century Cures Act was passed, and the QSEHRA was created, allowing small businesses 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.

In 2019, the U.S. government passed new regulations to expand HRAs, and the ICHRA was born. It allowed employers of any size to offer health reimbursement arrangements. ICHRA became available to employers on January 1, 2020.

HRAs Features

Health reimbursement accounts are appealing to both employers and employees for many reasons. Here are a few of the features 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.

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.

HRA administrators like ours make it easy for employees to submit for health insurance reimbursement. Once the employer chooses which HRA plan works best for them, they’ll set a budget and then let employees know they can use their HRA. The employees can then pay for their own health insurance premiums and medical expenses. After payments, employees submit their receipts for reimbursement from the plan.

Employees can take a photo of their receipts and then send it to their HRA plan for reimbursement. Our HRA administrators at Take Command provide a customized portal for employers and employees to make submitting and reviewing reimbursements seamless.

What to Expect With an HRA

HRAs are a popular alternative to traditional group health insurance. Your HRA gives you the freedom and flexibility you want to escape from the confines of group plans. With an HRA, there are:

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

Instead, you get the benefits of reimbursing your employees for health insurance, such as:

Tax efficiency
Flexible design
Budget control
Optimized benefits
You can get out of the health insurance risk management game.

There are several types of health reimbursement accounts for employers to consider in 2024. Take Command specializes in the two most common arrangements: ICHRA and QSEHRA.

ICHRA

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.

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 a hardship exemption)
Student Health Insurance Plans
No spouse plans or parental plans qualified for ICHRA reimbursements.

QSEHRA

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 employees for qualified healthcare expenses outlined by the IRS and/or individual health insurance premiums.

Qualified Health Plans and QSEHRA

Any plan that meets the Minimum Essential Coverage as outlined by the IRS in Section 106(g).
- 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 a hardship exemption)
- Student Health Insurance Plans
- Spouse’s Health Insurance Plan
- Parent’s Health Insurance Plan

Ineligible Plans

Sharing Ministry Plans
Short-term Plans
Indemnity Plans

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 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.

Which HRA is right for you?

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ICHRA Wins	ICHRA Loses
More control over costs: Employers can take charge of their own benefits budgets each year instead of being subject to yearly group increases.	Funds stay with the employer: If an employee leaves, unused HRA funds do not transfer, which can actually be an advantage for employers.
Greater plan flexibility: Employers can create a customized plan that works for the team instead of being forced to choose between whichever plans insurance companies offer.	Limited use for non-essential procedures: Employees cannot use it for cosmetic costs such as teeth whitening or other procedures or products deemed unnecessary. Again, most employers consider this a pro.
Greater network flexibility and personalization: Employees can select the individual plans and doctors that work best for them and can use HRAs for medical and dental expenses, prescriptions, annual exams, birth control medications, and more. Some HRA designs (including all of Take Command’s products) allow employees to use their HRA for insurance premiums.	Contribution limits based on plan types: Some HRA types limit employer contributions.
Risk de-management Employers no longer need to worry about factoring managing employees’ health risks into the business strategy.	Provider restrictions: Provider options may be limited based on the insurance market per geographical region.
Plan portability: Employees can keep their individual health insurance plans and don’t have to lose health coverage tied to a specific job.	No reimbursement for spouse’s premium: In some cases, employees on spouse’s plans cannot get reimbursed for their spouse’s premiums.
Potential rollover of unused funds: Employers can let unused HRA funds roll over to the next year.	Potential replacement of tax credits: Some HRA types can replace premium tax credits that specific individuals might otherwise receive.
Tax-advantages for medical costs: HRA funds are tax-free when used for qualifying medical expenses.	Limited integration with specific plans: Some HRAs don’t integrate with medical sharing plans or TRICARE, among others.
Easier health insurance enrollment: Some types of HRAs prompt a Special Enrollment Period, meaning it’s easier for employees to sign up for health insurance within 60 days of that change.	Employee resistance: Employees who are comfortable with a traditional group plan may be hesitant to switch to an HRA-based system, especially if they’re satisfied with their current coverage.
No payment for unwanted benefits: Employees only pay for the healthcare services they need without being charged for unneeded benefits.
Reimbursement for health insurance premiums: HRAs can cover individual health insurance premiums, helping employees with monthly coverage costs.
No group participation requirements: Employers don’t need to meet minimum participation rates, making HRAs a flexible option for smaller teams.
No proof of coverage is required monthly: Employees don’t need to provide proof of coverage each month to access HRA funds.
Expanded expense coverage: HRAs can reimburse various qualified expenses, including doctor visits, copays, dental cleanings, eyeglasses, and prescriptions. Some plans also cover dental and vision premiums.

Wondering how you could design your HRA?

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As the name implies, HRAs like ICHRA and QSEHRA are based on reimbursing employees for insurance rather than buying it for them. Here’s a step-by-step look at how to set up an HRA.

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 company size.
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 outside open enrollment dates on the individual market.
Design the plan: To design the HRA plan, the employer will need to determine eligible employees. For an ICHRA, the employer must 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.
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.
Educate employees: Employees must know how to use the HRA. From the reimbursement process to how premium tax credits work with the HRA, there’s a lot of ground to cover. Educating the employees on how it works can be daunting, but at Take Command, we help with the ins and outs of the new HRA.
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 decision-making for providers or policies, the employer can provide additional decision-making tools and information through the complicated process.
Choose: Employees purchase the individual plan they want.
Submit proof of coverage: Employees submit claims for reimbursement (can be as easy as snapping a picture of a receipt).
Reimburse: Employers reimburse employees for valid claims.

Both HRAs and HSAs help with healthcare costs, but they work differently. HRAs are employer-funded reimbursement arrangements, while HSAs are employee-owned savings accounts that allow contributions from both employees and employers up to certain limits set by the IRS. Unlike HRAs, HSAs act more like personal savings accounts for healthcare expenses, with employees controlling deposits and withdrawals.

Knowing these differences can help you choose the best benefits for your team. Interested in a deeper dive? Read our full comparison here.

HRAs vs HSAs Chart

Are HRA Accounts Use It or Lose It?

Not quite. The government doesn’t specify any policy on using it or losing it. It’s up to the employer to decide whether funds roll over to the next year. It’s important for the employee to understand their employer’s policy to be sure they are utilizing the HRA correctly.

What Happens to Unused Funds? Do HRAs Roll Over?

HRA funds do not roll over unless specified by the employer. When employers design the HRA, they determine if unused funds are forfeited or if they can roll over to the following year.

Streamline your benefits management. Switch to a hassle-free HRA plan!

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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 applies 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.
The IRA limits QSEHRA reimbursement amounts.

ICHRA	QSEHRA
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, 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 is 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 must be an employee. The corporate structure of the business often determines this.

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.

Unlock tax advantages with an HRA. Find out more today.

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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.

ICHRA Affordability

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.

QSEHRA Affordability

Since QSEHRAs are only available for employers with less than 50 full-time employees, they don’t fall under the affordability guidelines of 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 reimburses medical expenses to substantiate their claim, it must 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 HIPAA 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.

HRA Plan Administration in Four Simple Steps

The employer designs their HRA plan. Pro tip – it’s even easier when you work with an experienced partner like Take Command.
Employees purchase their preferred health insurance plan. Take Command even helps them do it and makes it super easy with tons of employee resources, including our window shopping tool.
After employees purchase their plans of choice, they can then submit eligible reimbursement claims to the employer.
Finally, the employer reimburses employees for all valid reimbursement claims.

This is a general set of steps that outlines the basic process of an HRA plan. For a more detailed explanation, check out our HRA benefits guide. The specifics of your plan setup will depend on which HRA you choose – QSEHRA or ICHRA. But one thing remains the same: the experts at Take Command are ready to help you at every step.

How to Choose an HRA Administrator

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)
  - ERISA
- HIPAA and PHI Compliance
- Process to substantiate employee claims
- Reimbursement mechanism
Process, Compliance, and Reporting: Like any healthcare coverage change, it’s important to communicate with your employees effectively. When considering an administrator, take into account their change management plan.
- Provide communication materials for employees and a robust onboarding process.
- Offer employee support while shopping for individual health insurance plans.
- Access an easy-to-use platform to request reimbursements.
Employer Support: Like any healthcare coverage change, it’s important to communicate with your employees effectively. When considering an administrator, take into account their change management plan.

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 for 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 allow employers to provide health benefits without breaking the bank.
How are individual insurance rates in your area? Understanding the individual insurance market in your area is important. If the rates are not great, employees will have few choices for insurance coverage.
How will you manage the switch? Whether you’re switching from 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.

Got more questions? We have more answers

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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.

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?

About the author

Briana A.

With 15 years in the communications field, Briana is a content writer with a passion for making complex issues readable, understandable, and digestible. Her career is layered with experience working with Fortune 100 companies, non-profits, and start-ups. She specializes in employee benefit communication.

Briana is a married mother of two young girls in the Midwest. She loves yoga, volleyball, and reading by the pool.

HRA Guide: An Overview of Health Reimbursement Arrangements

What Is an HRA?

What Does HRA Stand For?

HRA History

HRAs Features

How Does an HRA Plan Work?

What to Expect With an HRA

Types of HRAs (Health Reimbursement Accounts)

ICHRA

Qualified Health Plans and ICHRA

QSEHRA

Qualified Health Plans and QSEHRA

Ineligible Plans

Other HRA Types:

Which HRA is right for you?

HRA Pros and Cons

Why HRAs Stand Out as a Competitive and Flexible Option

Wondering how you could design your HRA?

How to Implement an HRA

What Is the Difference Between HRAs vs. HSAs?