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Health reimbursement arrangement (HRA) eligibility FAQs

Health Benefits • October 4, 2024 at 8:00 AM • Written by: Chase Charaba

Finding health benefits for your organization can be daunting. Small employers are turning to health reimbursement arrangements (HRAs) to offer health benefits to their employees. An HRA gives organizations a way to provide quality benefits without the high costs of group health insurance.

But, since many organizations aren’t familiar with the benefit, they have questions about who is eligible to participate. Understanding HRA eligibility is essential for those looking to implement this benefit.

This blog post will answer some of the most frequently asked questions about HRA eligibility.

In this blog post, you'll learn:

  • How an HRA works
  • Which organizations can offer an HRA
  • Who can participate in the HRA
Do you have fewer than 50 employees? Learn about the qualified small employer HRA (QSEHRA) in our guide.

What is a health reimbursement arrangement (HRA)?

First, let’s explore what an HRA is. An HRA is an employer-funded health benefit. It allows employers to reimburse their employees tax-free for qualifying medical expenses. Depending on the type of HRA you offer, this can include individual health insurance premiums. This makes an HRA an excellent alternative to a traditional group health insurance plan.

Here’s how a stand-alone HRA works. Instead of paying for your employees’ group health insurance premiums directly, you give them the freedom to choose the plan that best fits their needs. Then, they request reimbursement for their premiums and potentially other out-of-pocket expenses.

Because you set how much you’ll offer employees each month in allowances, you’re able to stick to your budget. There aren’t any rate increases, and you don’t have to worry about minimum participation requirements. And, if any employees leave your organization, any unused funds stay with you.

You can offer the following types of HRAs:

What organizations can offer an HRA?

HRAs are a versatile solution for organizations of all sizes. No matter your size or industry, there’s an HRA that works for you.

An organization’s eligibility to offer an HRA depends on its size and the type of benefit it wants to offer.

HRA type

Business HRA eligibility rules

QSEHRA

Organizations with fewer than 50 full-time equivalent employees (FTEs) can offer a QSEHRA. Employers can’t offer a group plan.

ICHRA

Organizations of all sizes can offer an ICHRA if they have at least one W-2 employee.

GCHRA

Only organizations with a traditional group health insurance plan can offer a GCHRA.

EBHRA

Only organizations with a traditional group health insurance plan can offer an EBHRA.

Retiree

Organizations of all sizes can offer a retiree-only HRA.

Who is eligible to participate in an HRA?

With the exception of a retiree-only HRA, only current W-2 employees and their qualified dependents can participate in an HRA. Specific eligibility rules differ by type of HRA.

HRA type

HRA Employee eligibility rules

QSEHRA

You must offer the benefit to all W-2 full-time employees. You can also offer a QSEHRA to part-time employees on the same terms as full-time employees. Employees must have a health plan with minimum essential coverage (MEC) to participate.

MEC can include qualifying individual health insurance plans or coverage through a spouse’s or parent’s group plan.

ICHRA

Organizations can customize ICHRA eligibility with 11 different employee classes. Only W-2 employees can participate in the benefit. Employees must have a qualifying form of individual health insurance coverage to participate.

GCHRA

To participate in a GCHRA, employees must enroll in the employer’s traditional group health plan.

EBHRA

Employees must have been offered a group health plan to participate in an EBHRA. However, they don’t need to participate in the group plan to take part in the EBHRA.

Retiree

Only retirees can participate in a retiree-only HRA.

If you’re offering a QSEHRA or ICHRA to your employees, this creates a 60-day special enrollment period. This allows them to shop for a plan that fits their needs so they can participate in the HRA.

Who are qualified HRA dependents?

A qualified HRA dependent must be a dependent according to the IRS definition.

IRS Publication 502 describes dependents as1:

  • Spouses: legally married partners of the employee
  • Qualifying children: This includes natural, adopted, or stepchildren
  • Qualifying relatives for whom you provide 50% or more of the support for the year

Spouses and dependents must also meet the requirements of the HRA for employees to request reimbursement for expenses on their behalf. For example, dependents must also have qualifying individual health insurance to participate in an ICHRA.

Can a business owner participate in an HRA?

Yes, some business owners can participate in an HRA. Eligibility depends on whether the IRS classifies you as a common law W-2 employee. For example, C corporation owners can participate in an HRA because they are W-2 employees of the organization. However, sole proprietors, partners, and S corp shareholders who own more than 2% of shares can’t participate.

Sole proprietors and partners can participate through their spouses if they’re W-2 employees of the business.

Learn more about business owner eligibility for specific types of HRAs:

Can 1099 contractors participate in an HRA?

No, 1099 contractors can’t participate in an HRA. Only W-2 employees and their qualifying dependents can participate in the benefit.

Can I customize HRA eligibility?

Yes, employers can customize HRA eligibility. Your HRA plan design allows you to set specific eligibility requirements for participation.

This differs depending on the type of HRA you offer:

  • With a QSEHRA, you can choose to only offer the benefit to full-time employees or extend the benefit to part-time employees, too. You can also set waiting periods for new hires.
  • An ICHRA allows you to differ allowances and eligibility with 11 employee classes. For example, you can offer the benefit to only full-time employees or salaried employees. Or, you can offer your full-time employees a group plan and give your part-timers an ICHRA allowance. You can also set waiting periods for new hires.
  • Like an ICHRA, a GCHRA allows you to customize eligibility with seven employee classes.

Which expenses are eligible for reimbursement?

HRAs allow you to reimburse employees for qualifying expenses listed in IRS Publication 502 and the CARES Act. With a QSEHRA or ICHRA, this includes individual health insurance premiums.

Here are some of the expenses you can reimburse employees for:

  • Prescription drugs
  • Over-the-counter medicine
  • Contact lenses
  • Cough syrup and cold medicines
  • Dental services

How PeopleKeep can help you offer an HRA

HRAs offer employers a flexible way to provide health benefits. PeopleKeep streamlines HRA administration for the QSEHRA, ICHRA, and GCHRA. With our software, employers can efficiently manage their health benefits.

We help you ensure compliance with IRS guidelines by automatically generating legal plan documents. We also review employee reimbursement requests for you. This safeguards you from ineligible reimbursements and HIPAA concerns. Once we verify eligible expenses, we will notify you so you can process the reimbursement.

Finding health coverage can be tough for employees, many of whom will be doing so for the first time. That’s why our platform features an integrated shopping experience. This allows your employees to find a health insurance plan or ancillary coverage right from their dashboard. Our licensed team of experts is also available to help with plan enrollments.

Conclusion

HRAs allow employers to reimburse their employees for qualifying medical expenses. Eligibility for different HRAs hinges on factors like health insurance enrollment and employer size. Employers can customize these arrangements to meet their specific needs. HRAs are an excellent choice for your comprehensive benefits package, enabling better management of healthcare costs.

If you’re ready to offer an HRA to your staff, PeopleKeep can help! Contact an HRA specialist to get started.

This article was originally published on March 14, 2013. It was last updated on October 4, 2024.

1. https://www.irs.gov/pub/irs-pdf/p502.pdf

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Chase Charaba

Chase Charaba is the Content Marketing Manager at PeopleKeep. He joined PeopleKeep as a content marketing specialist in February 2022. As someone who has written about HRAs for almost three years and personally used both a QSEHRA and ICHRA, he has a deep understanding of the benefits and how they can help small employers and their employees. Chase has written more than 350 blog posts for various companies and projects throughout his career. He’s worked with digital marketing agencies and in-house marketing teams. He’s also an aspiring fiction author, landscape photographer, and small business owner.