Does an HRA work with Medicaid?

Medicaid is a government program that provides health insurance coverage to low-income individuals and families. It covers some of the most vulnerable populations, including children, pregnant women, seniors, and people with disabilities, making it a vital resource for millions of Americans to get healthcare. As of July 2024, Medicaid covers almost 73 million individuals.¹

A health reimbursement arrangement (HRA) is a budget-friendly alternative to group health insurance. With an HRA, employers can reimburse employees tax-free for qualified out-of-pocket medical expenses, regardless of their financial situation or health status.

If your employer is offering you this type of health benefit, you may wonder how Medicaid works with an HRA. The answer depends on the type of HRA your employer is offering.

In this blog post, you’ll learn:

• How Medicaid eligibility and coverage works.
• The compatibility of various types of HRAs with Medicaid.
• How HRAs can help manage healthcare costs for employees with or without Medicaid.

How does Medicaid work?

Many people confuse Medicare and Medicaid. Medicare is a government program that provides insurance to individuals age 65 or older or those with certain disabilities, regardless of income. Medicaid provides coverage for those with limited incomes and resources.

The federal and state governments jointly fund the Medicaid program. The federal government sets general standards that all states must follow. Then, each state runs its own health insurance program. So, the conditions of eligibility vary depending on your geographic location.

Generally, here’s how the eligibility process works:

• By law, states must cover low-income families, qualified pregnant women, qualified children, and individuals who receive Supplemental Security Income (SSI). States may choose to cover other groups.
  • Forty-one states and Washington D.C. have expanded their Medicaid programs to cover residents with household incomes below a certain income level.² This is known as Medicaid expansion.
  • Under the Affordable Care Act (ACA), states can expand Medicaid to anyone with a household income below 133% of the federal poverty level (138% in practice).³
• Besides income, eligibility can depend on age, the number of people in your family, and if you’re pregnant or have a disability. You must also meet the financial and non-financial eligibility requirements.
  • Financial eligibility. States will use your modified adjusted gross income (MAGI) to determine eligibility. Some individuals may be eligible for Medicaid due to blindness, disability, or age (if they’re 65 or older), regardless of income.
  • Non-Financial Eligibility. Typically, you must be a resident of the state you’re applying for Medicaid coverage. You must also be a U.S. citizen or a qualified non-citizen, such as a lawful permanent resident. You can review the list of documents you’ll need to apply through your state’s Medicaid agency.⁴
• States can choose to create a “medically needy” program. This program is for individuals with serious medical needs whose incomes are too high to qualify otherwise.
  • Medically needy individuals must “spend down” the difference between their income and their state’s Medicaid limit on healthcare expenses. Once they reach the limit, they’ll qualify for coverage.

If you’re eligible, your health coverage will begin on the date of your application or the first day of the month of your application. You can also receive retroactive coverage for up to three months before the month of your application if you would have been eligible during that time. States can charge limited monthly premiums and set cost-sharing requirements for coverage.⁵

The Consolidated Appropriations Act ended continuous Medicaid coverage on March 31, 2023.⁶ If you're still an eligible person, you must renew each year to continue receiving benefits.

How does Medicaid work with the ICHRA?

First, let’s review how Medicaid works with the individual coverage HRA (ICHRA). An ICHRA is a health benefit that an increasing number of employers are offering as an alternative to group coverage. With this type of HRA, you can receive tax-free reimbursements for health insurance premiums and other qualified medical costs. There’s no maximum contribution limit, and your employer can vary allowances and eligibility with employee classes.

Employees must have a qualifying form of individual health insurance to participate in the ICHRA. Medicaid provides minimum essential coverage (MEC), which is one part of the eligibility requirements. But it doesn’t qualify as individual coverage. So, those with Medicaid are ineligible for the benefit.

Luckily, if your employer offers you an ICHRA, you can use your HRA allowance to buy a qualified individual health plan instead. When you’re newly eligible for the benefit, you’ll trigger a special enrollment period (SEP). This means you can enroll in a health plan on the individual market within 60 days of them offering you the ICHRA.

You’ll want to carefully evaluate your options if you find yourself in this situation. While enrolling in an individual policy doesn't disqualify you from Medicaid, there are rules that impact how Medicaid and private insurance interact with one another.

If your employer administers your ICHRA through PeopleKeep, you can enroll in health plan coverage from your PeopleKeep account.

Learn more about the ICHRA special enrollment period in our blog post.

How does Medicaid work with the QSEHRA?

Next up is the qualified small employer HRA (QSEHRA). The QSEHRA is for employers with fewer than 50 full-time equivalent employees (FTEs). Like the ICHRA, reimburses employees for individual health plan premiums and other medical expenses. While it has no minimum contribution limits, the IRS sets annual maximum limits.

Full-time W-2 employees are automatically eligible for the QSEHRA. But, you must have a health plan that provides MEC to participate in the benefit. Since Medicaid meets MEC requirements, employees with this type of coverage can take advantage of the QSEHRA.

If you have access to a QSEHRA, you may be able to use the benefit to get reimbursements for your out-of-pocket medical expenses, depending on how your employer designs the QSHRA. If your state charges you a small monthly premium for Medicaid, those payments are also eligible for reimbursement. You can also consider enrolling in ancillary coverage like vision or dental and use your allowance to pay for those premiums.

Thanks to a SEP, you can use your QSEHRA allowance to purchase an individual health plan, if you want to get off Medicaid. If your employer offers you a QSEHRA through PeopleKeep and you decide to go this route, you can shop for a plan right from your PeopleKeep account.

How does Medicaid work with the GCHRA?

Lastly, let’s go over the group coverage HRA (GCHRA). This HRA is only for companies that offer a group health plan, and only employees enrolled in their employer’s group plan can participate. Since Medicaid isn’t an employer-sponsored group plan, it’s incompatible with the GCHRA.

You can enroll in your employer-funded group health plan and use the GCHRA benefit. The group plan will provide comprehensive coverage, and your employer can reimburse you for medical costs your plan doesn’t cover, such as deductibles and copays.

Conclusion

Not all types of HRAs work with Medicaid. While you can participate in a QSEHRA with Medicaid coverage, you’ll be ineligible for an ICHRA or GCHRA. If your employer has an ICHRA—don’t worry. You can use your ICHRA allowance to buy qualified individual coverage, allowing you to ditch your Medicaid plan. In either case, an HRA is an excellent way to control your out-of-pocket medical costs so you experience more financial security.