If you own a small business, you might be looking for ways to stand out in the recruiting process or convince hardworking employees to stay with your company. One way to do so is to support your employee’s health and well-being by providing small business health insurance, and that is where setting up a Health Reimbursement Arrangements (HRA) or Health Savings Account (HSA) for your employees comes in.

Under the 21st Century Cures Act signed into law in 2016, small business owners now have more options and flexibility to help their employees pay for health insurance. They are no longer required to offer ACA-compliant group health insurance in order to provide their employees with (HRAs). But what is an HRA, and how do HRAs work?

If you are interested in setting up an HRA medical plan, we will discuss how they work, the different types of HRAs, and how you can find the right plan for your employees. You might also want to learn about the difference between an HSA and HRA.

What is an HRA?

An HRA or a Health Reimbursement Arrangement is a group health plan funded by the employer that reimburses employees for their qualified medical expenses. These reimbursements are tax-free and typically have a fixed dollar amount per year. There are some types of HRA plans that can also reimburse employees for their insurance premiums. When employers contribute to this type of plan for their employees, they are allowed to claim a tax deduction for the reimbursement that they offer through these plans.

Types of HRAs

Integrated HRA

An Integrated Health Reimbursement Arrangement (HRA) is a type of employer-sponsored benefit plan that complements a group health insurance plan. Under this arrangement, employees receive health coverage from their employer, which covers specific medical expenses like doctor visits and hospital stays. Simultaneously, the Integrated HRA allows employees to set aside pre-tax dollars, provided by their employer, into a separate account. These funds can be used to reimburse eligible out-of-pocket healthcare expenses such as copayments, deductibles, or services not covered by their primary insurance plan.

The key feature of Integrated HRAs is their coordination with the group health plan. These HRAs align with the provisions of the primary health insurance plan, ensuring that eligible expenses are synchronized. This integration enables employees to effectively manage their healthcare costs, enhances the overall benefits package offered by employers, and provides additional financial support for healthcare expenses. Integrated HRAs strike a balance between supplementing existing health coverage and maintaining a structured and coordinated approach to healthcare benefits.

Qualified Small Employer HRA (QSEHRA)

This is one of the most popular HRAs among small business owners. A Qualified Small Employer HRA (QSEHRA) plan allows small employers to provide non-taxed reimbursement for specific healthcare expenses. Common examples include health insurance premiums and coinsurance. To qualify for this plan, a small business owner has to have fewer than 50 full-time employees, provide the same terms to each full-time employee, and not offer a group health plan, such as a flexible spending account (FSA). Employers can decide how much money they will contribute toward their employees’ medical expenses, up to an annual limit that has been determined by the IRS.

Individual Coverage HRA (ICHRA)

Another option is an Individual Coverage HRA (ICHRA). This plan has only been available during the past few years, and a recent change has made them more appealing to small business owners. Now, this individual plan can be used to cover insurance premiums. Employees can use the money in this plan to purchase their own individual health insurance with pretax dollars, which could help them save money on their taxes. Furthermore, employees can use this money as a reimbursement for qualified health expenses, including deductibles and copays. This plan is more flexible than the qualified small employer HRA above.

Retiree HRA

 A Retiree Health Reimbursement Arrangement (HRA) is a specialized benefit designed to assist retirees in covering healthcare costs during their retirement years. These HRAs are typically established by employers or plan sponsors to provide financial support to retirees, helping them manage their healthcare expenses after leaving the workforce.

Retiree HRAs work by allowing employers to contribute a specified amount of money into a tax-advantaged account for each eligible retiree. These funds can then be used by retirees to reimburse themselves for various healthcare-related expenses, including premiums for Medicare, Medigap, or other supplemental insurance plans, as well as out-of-pocket costs like copayments, deductibles, and prescription drugs. Unlike standard HRAs, Retiree HRAs are often not tied to an active employment situation, making them a valuable tool for retirees who may no longer have access to traditional employer-sponsored health insurance.

The primary advantage of Retiree HRAs is that they provide retirees with a predictable and tax-advantaged source of funds to help cover their healthcare costs in retirement. This financial support can be particularly valuable, given that healthcare expenses tend to increase with age, and retirees often face limited income options. Retiree HRAs offer retirees greater flexibility and control over their healthcare spending, helping to alleviate the financial burden of medical care during retirement and contribute to a more secure and comfortable post-work life.

Suspended HRA

 A Suspended Health Reimbursement Arrangement (HRA) is a specific type of HRA arrangement where contributions or reimbursements are temporarily halted for a specified period. This concept is primarily associated with HRAs that are subject to specific triggering events or circumstances that temporarily suspend their operation.

There are a few scenarios where contributions or reimbursements in a Suspended HRA may be temporarily halted:

1. Leave of Absence: In some cases, when an employee goes on a leave of absence, such as maternity leave, sabbatical, or a temporary work hiatus, contributions to their HRA may be suspended. During this period, the employee may not receive new contributions to their HRA, but they typically retain access to any existing funds in their account for eligible expenses.
2. Loss of Eligibility: If an employee loses eligibility for the HRA due to a change in employment status or other qualifying factors, their contributions may be suspended. For example, if an employee switches to a different benefits plan or is no longer employed by the company, they may no longer receive contributions to their HRA.
3. Exhaustion of Funds: In some cases, HRAs may be structured to provide a fixed amount of funds annually. If an employee exhausts the available funds before the end of the plan year, they may need to wait until the next plan year for additional contributions to resume.
4. Plan Amendments: Employers may make changes to their HRA plans, which can affect contributions and reimbursements. These changes may result in temporary suspensions while the plan is updated and amended to reflect the new terms.

It’s important to note that the specific rules and circumstances surrounding Suspended HRAs can vary depending on the plan’s design and employer policies. Employees and plan participants should review their HRA plan documents and communicate with their benefits administrator or human resources department to understand the specific terms and conditions governing their HRA.

Group Coverage HRA

Also called an Excepted Benefit HRA, a group coverage HRA provides employers with an opportunity to supplement a group health insurance plan. This HRA is available to companies of all shapes and sizes, and it is frequently offered alongside health insurance policies. This type of plan is more popular at larger companies, but it can be beneficial for small businesses as well. It is ideal for companies that want to supplement an existing group health insurance plan.

How HRAs work

In general, HRAs follow this simple process:

1. The employer will set up an HRA account and choose the amount of health care allowance they will offer to their employees tax-free. In 2020, employers can put up to $5,250 in the account for a single employee and $10,600 for an employee and their family. 
2. The employee can then purchase a health insurance plan that suits their needs. In this step, the employer usually offers little to no input, but there may be some expenses that are not eligible for reimbursement. The HRA money can be used to pay their monthly premiums or for any out-of-pocket costs.
3. Then, the employee will submit a proof of purchase to their employer including a description of the product or service they purchased, how much it cost, and when the product or service was purchased. This is usually in the form of a receipt or an invoice.
4. If the claim is accepted, then the employee will be reimbursed. For small businesses, the reimbursement will typically be included in the employee’s next paycheck without any taxes.

One thing to note is that employees who receive HRA contributions typically won’t be eligible for government subsidies when buying coverage on their own through a government exchange.

Funding and contributions

 Health Reimbursement Arrangements (HRAs) are funded by employers. Employers allocate a predetermined amount of money into each employee’s HRA account. These funds can be used by employees to pay for eligible healthcare expenses. Contributions made by the employer are typically tax-deductible for the employer and tax-free for the employee. The amount contributed to each employee’s HRA can vary depending on the employer’s plan design, and unused funds may often roll over from year to year, subject to plan rules.

Eligible expenses

HRAs are designed to cover a wide range of eligible healthcare expenses. These expenses can include but are not limited to:

• Health insurance premiums (excluding premiums for non-group coverage)
• Co-payments and deductibles
• Prescription medications
• Dental and vision care
• Over-the-counter (OTC) medications and supplies (if allowed by the plan)
• Medical equipment and supplies
• Mental health and substance abuse treatment
• Preventive care services

It’s crucial for employees to consult their HRA plan documents or their employer’s benefits administrator to understand the specific expenses that their HRA covers, as plan designs can vary.

Reimbursement process

 The reimbursement process for HRAs typically involves the following steps:

1. Incur eligible expenses: Employees incur qualified healthcare expenses and retain documentation (such as receipts or invoices) as proof of the expenses.
2. Submit a claim: Employees submit a claim to their HRA administrator, which includes details of the expenses incurred, along with supporting documentation.
3. Verification: The HRA administrator verifies that the expenses are eligible according to the plan’s guidelines.
4. Reimbursement: Once the expenses are verified, the HRA administrator disburses funds from the employee’s HRA account to reimburse the employee for the eligible expenses.
5. Recordkeeping: Both the employer and the employee should maintain accurate records of HRA contributions, reimbursements, and eligible expenses for tax and reporting purposes.

It’s essential for employees to follow their HRA plan’s specific procedures and deadlines for submitting claims to ensure timely reimbursement. Additionally, any funds left in the HRA account at the end of the plan year may roll over, depending on plan rules, or be forfeited, so employees should be aware of their plan’s terms to maximize their benefits.

Benefits of HRAs

There are several significant benefits of HRAs. They include:

• Flexibility: There is a tremendous amount of flexibility. The employer is responsible for designing the HRA, and they can craft it to match any budget or style.
• Employees pay for their own expenses: The employees decide how they want to spend their money. Typically, unless specified, all items listed under IRS Publication 502 are eligible for reimbursement. This includes many options such as birth control pills, disabled dependent care expenses, and operations 
• Proof of payment: Employees are also responsible for providing proof of payment to get reimbursed. This means that employers don’t have to worry about people using the money for things that they don’t have to.
• Reduce tax liability: Both employers and employees can save money on their taxes. Employers may be able to claim the money they put in the HRA as a tax deduction, and employees can get reimbursed without having to pay taxes on that money.

Flexibility for employers

Health Reimbursement Arrangements (HRAs) offer employers a valuable tool for enhancing flexibility in benefit planning. Firstly, HRAs allow employers to tailor benefits to the specific needs of their workforce. Employers can customize HRA plans to address the unique healthcare requirements of their employees, offering different contribution levels or coverage for particular types of medical expenses. This flexibility enables employers to cater to a diverse range of health and wellness needs within their organization, thereby enhancing employee satisfaction and engagement.

HRAs provide employers with a means of controlling healthcare costs. By determining the amount of contributions allocated to each employee’s HRA account, employers can establish a budgetary framework while still offering valuable healthcare benefits. Additionally, HRAs often encourage cost-conscious behavior among employees, as any unused funds may revert to the employer at the end of the plan year, thus promoting responsible spending. This combination of customization and cost control makes HRAs a versatile option for employers seeking to offer competitive benefits while managing healthcare expenditure effectively.

Empowering employees

 Health Reimbursement Arrangements (HRAs) offer several ways to empower employees when it comes to their healthcare. Firstly, HRAs grant employees access to personalized healthcare options. By providing a designated account funded by their employer, employees can select and manage their healthcare services according to their unique needs. This flexibility allows them to choose the most suitable providers, treatments, and preventive measures, fostering a sense of autonomy and control over their health-related decisions.

HRAs offer the advantage of portability. Employees can retain their HRA benefits even if they change employers, providing a level of continuity and stability in their healthcare coverage. This portability ensures that employees do not lose the funds accumulated in their HRA account when transitioning between jobs, ultimately enhancing their sense of security and ownership over their healthcare benefits. Overall, HRAs empower employees by offering them both personalization and flexibility in their healthcare choices while safeguarding their benefits in times of career transitions. 

Tax advantages

 Health Reimbursement Arrangements (HRAs) offer notable tax benefits for both employers and employees. Employers can enjoy the advantage of tax-deductible contributions when funding their employees’ HRAs. These contributions are considered tax-deductible business expenses, reducing the employer’s taxable income and potentially resulting in tax savings for the company. Moreover, these contributions are not counted as taxable income for employees. On the employee’s side, HRAs allow tax-free withdrawals for qualified medical expenses. When employees use HRA funds to cover eligible healthcare costs, they do not incur income tax on these withdrawals, providing a financial advantage and encouraging responsible use of HRA funds. This tax-efficient feature enhances the overall value of healthcare benefits for employees while simultaneously reducing the tax burden associated with healthcare expenses for both employers and employees.

Compliance and regulations 

Compliance and regulations in the business world are crucial aspects that ensure organizations adhere to legal and ethical standards.

IRS guidelines

 Compliance with IRS regulations is paramount when it comes to Health Reimbursement Arrangements (HRAs). Following the guidelines established by the IRS is not only a legal obligation but also crucial for avoiding potential penalties and ensuring the tax-favored status of HRAs. Employers need to stay informed about the ever-evolving IRS rules and regulations regarding HRAs to remain in good standing.

Additionally, IRS regulations entail specific reporting and documentation requirements for HRAs. Employers must maintain accurate records and documentation of HRA contributions, distributions, and employee reimbursements. This documentation is not only vital for tax purposes but also for demonstrating compliance during potential IRS audits or inquiries. By diligently adhering to IRS guidelines and fulfilling reporting and documentation requirements, employers can navigate the complex regulatory landscape surrounding HRAs while providing valuable healthcare benefits to their employees in a legally compliant manner.

Affordable Care Act (ACA) considerations

The relationship between Health Reimbursement Arrangements (HRAs) and the Affordable Care Act (ACA) is significant. Under the ACA, HRAs must be integrated with ACA-compliant group health insurance plans to ensure compliance. This integration necessitates that HRAs work alongside health plans that meet the ACA’s standards for essential coverage and affordability. Furthermore, HRAs are subject to specific annual contribution limits and usage restrictions when it comes to purchasing individual health insurance plans. Adhering to these ACA provisions is crucial for employers to avoid penalties and ensure that HRAs align with the ACA’s objectives of expanding access to affordable healthcare coverage.

To ensure compliance with ACA rules, employers should take several key steps. Firstly, it is imperative that HRAs are integrated with group health plans that meet ACA standards for essential coverage and affordability. Employers should carefully assess their group health plans to verify that they align with ACA regulations and that HRAs complement the overall benefits package effectively. Secondly, employers must be vigilant about the annual contribution limits set by the ACA for HRAs, as these limits are subject to change and may require adjustments. Clear communication to employees regarding the integration of HRAs with their group health plans and education on the permissible uses of HRA funds under the ACA is also vital. Staying well-informed about any updates or changes in ACA regulations and seeking guidance from legal or benefits professionals can assist employers in maintaining ACA compliance for their HRAs, ultimately avoiding penalties and providing compliant healthcare benefits to their workforce.

Choosing the right type of HRA

Choosing the right Health Reimbursement Arrangement (HRA) for your organization is a crucial decision that can significantly impact both your employees’ healthcare benefits and your company’s financial bottom line. Here are some key tips and factors to consider when selecting an HRA, with a strong emphasis on customization based on your workforce’s specific needs:

1. Assess your workforce’s healthcare needs: Start by analyzing your employees’ healthcare needs and preferences. Consider factors such as age demographics, health risk profiles, and common medical expenses within your workforce. This data will help you determine which type of HRA will be most beneficial for your employees.
2. Determine your budget: Establish a clear budget for HRA contributions. Understanding how much your organization can afford to contribute to employees’ HRAs will guide your choice of plan design, contribution amounts, and overall benefits package.
3. Understand HRA types: Familiarize yourself with the various HRA types available, such as Integrated HRAs, Qualified Small Employer HRAs (QSEHRAs), or Retiree HRAs. Each type has its unique features, rules, and compliance requirements, so choose the one that aligns best with your organization’s goals.
4. Consider plan design flexibility: Look for HRAs that offer flexibility in plan design. Customization is essential to tailor the HRA to your employees’ needs, whether it’s for covering specific expenses like deductibles or providing options for carryover of unused funds.
5. Compliance with regulations: Ensure that the HRA plan you select complies with all relevant regulations, including those set forth by the IRS and the Affordable Care Act (ACA). Compliance is critical to avoid penalties and maintain tax-favored status.
6. Employee communication and education: Develop a robust communication and education strategy for your employees. Clear and comprehensive communication about the HRA plan, its features, and how to use it effectively is essential for employee engagement and satisfaction.
7. Seek expert guidance: Consider consulting with benefits professionals, legal experts, or insurance advisors who specialize in HRAs. They can provide valuable insights and help you navigate the complexities of plan design, compliance, and implementation.
8. Monitor and adjust: Once you’ve implemented the HRA, regularly review its performance and employee feedback. Be prepared to make adjustments to the plan as needed to ensure it continues to meet the evolving needs of your workforce.

What is an HRA? FAQs

How can I start a Qualified Small Employer HRA?

If you are interested in setting up this type of HRA, you need to provide written notice to new employees that you are establishing a plan and that they are eligible to participate. You should think carefully about when you notify your employees, as you want to give them an opportunity to choose coverage during an open enrollment period. Plan deductibles tend to reset on January 1st, but there’s also a chance that your employees may qualify for a Special Enrollment Period, which makes it easier for them to change or select new health insurance.

How much can employers contribute to Qualified Small Employer HRAs?

The limit changes from year to year. In 2024, employers can provide a maximum reimbursement of $6,150 for individual employee coverage, equivalent to $512.50 per month, through a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). For family coverage, the maximum reimbursement allowable is $12,450, or $1,037.50 per month. It’s important to note that these reimbursement limits are subject to annual indexing by the IRS.

What does a Qualified Small Employer HRA cover?

Expenses from an HRA can be used to cover a wide variety of expenses, including insurance premiums, copayments, and deductibles. They can also cover an annual physical exam, prescription medications, and treatment at a medical facility.

Can HRA funds roll over to the next year?

Yes, they do roll over to the next year, but the employer may set a maximum rollover limit if desired.

How do HRAs differ from HSAs?

An HRA is a plan that the employer sets up to reimburse employees for medical expenses. In contrast, an HSA is an account set up by individuals and doesn’t necessarily require the involvement of an employer. Learn more about HSA-compatible health plans.

Learn more about small business health insurance options with eHealth

If you are a small business owner, an HRA could help you attract and keep talented employees by providing them with money they can use to cover certain medical expenses.  For more information about Health Reimbursement Arrangements for small businesses, speak with an accountant or a legal or tax advisor. To learn more about your small business health insurance options, explore ehealthinsurance.com or speak to one of our licensed insurance agents.

This article is for general information and may not be updated after publication. Consult your own tax, accounting, or legal advisor instead of relying on this article as tax, accounting, or legal advice.