Guide to health reimbursement arrangements (HRAs)

What is a health reimbursement arrangement (HRA)?

When were HRAs created?

HRAs started to become popular in the 1990s. Known as defined contribution plans, they allowed employers to reimburse employees for non-critical medical expenses, like prescription eyeglasses. Some employers went further, designing HRAs to reimburse employees for all sorts of healthcare expenses.

On June 26, 2002, the IRS formally recognized HRAs with Revenue Ruling 2002-41 and IRS Notice 2002-45. This notice established new rules for HRAs, such as requiring them to be solely employer-funded and requiring substantiated medical expenses for reimbursement.

In 2013, IRS Notice 2013-54 limited organizations’ ability to offer certain types of HRAs due to the Affordable Care Act (ACA). Employers could now only integrate HRAs with a traditional group health plan that met ACA standards.

Congress provided relief in December 2016 when it created the QSEHRA, allowing small employers with fewer than 50 full-time equivalent employees (FTEs) to reimburse employees for health insurance premiums and out-of-pocket expenses.

In October 2017, then-President Donald Trump issued an executive order asking the Departments of the Treasury, Labor, and Health and Human Services to expand HRAs. The Departments finalized their plans on June 13, 2019, creating the ICHRA and the excepted benefit HRA (EBHRA). These two new HRAs were first available to employers on January 1, 2020.

What are the benefits of HRAs?

There are many benefits to offering HRAs to your employees. We’ll review the most significant benefits below.

1. Accessible to all employers and budgets

Traditional group health insurance coverage isn’t the best option for many employers because of its complexity, unpredictable rate increases, and strict participation requirements. An HRA is a more accessible alternative that isn’t subject to annual rate hikes or minimum participation requirements. Employers can set a monthly allowance that best fits their budget. Employees then request reimbursement for any qualified medical expenses they choose.

2. Empower employees

A group health insurance plan lumps employees into a one-size-fits-all plan. This prevents employees from choosing their coverage, network, or premium amount. Employees may get stuck with a plan that doesn’t work with their preferred doctors or services.

An HRA solves this problem by empowering employees to choose which expenses they want to submit for reimbursement. With stand-alone HRAs like the QSEHRA or ICHRA, employees can choose an individual health insurance plan that fits their unique needs.

3. Tax advantages

With an HRA, reimbursements are free of payroll taxes for employers. If employees are covered by a policy providing minimum essential coverage (MEC), such as a plan from the state or federal marketplaces, their HRA funds are also free of income taxes.

4. Promote retention and employee satisfaction

Offering an HRA as part of a benefits package can help you attract and retain top talent. Our 2022 Employee Benefits Survey found that 65% of employees value choosing their own benefits. HRAs provide individuality by allowing employees to choose a health plan and submit expenses that matter most to them. When your employees feel cared for, they’re more likely to stay at your organization.

5. No wasted benefits spend

With traditional benefits, your organization is stuck paying a portion of the cost, even if your employees don’t utilize the benefits. With an HRA, you only reimburse employees for eligible expenses they incur. This means if your employees don’t use their total allowance for the year, you can keep the remainder. Unused funds also stay with you if an employee leaves your organization. This results in even greater potential cost savings over a group plan.

How does an HRA work?

With an HRA, employers offer a tax-free monthly allowance to their employees for eligible medical expenses listed in IRS Publication 502 and the CARES Act. Employees then purchase the healthcare items and services they need. Depending on the HRA an employer offers, this can include health insurance premiums. The employer then reimburses them up to their available allowance amount.

If you’re new to offering HRAs, PeopleKeep can help. We’re experts on HRA administration and help thousands of employers reimburse their employees through our hassle-free administration software.

Here's a breakdown of the HRA process:

Step 1: Design your benefit and set an allowance

First, employers design their HRA benefits to uniquely suit the needs of their organization and their employees. When setting up your HRA, you’ll decide how much tax-free money you want to offer to employees each month, which type of expenses you’d like to make eligible for reimbursement from IRS Publication 502, and, depending on the HRA, potentially decide if you’d like to offer different benefits or allowances to employees in different groups.

Step 2: Employees make healthcare purchases

Once you set your benefit up, employees can request reimbursement for medical expenses. If you offer a QSEHRA or ICHRA, employees can purchase qualifying medical expenses or individual health insurance premiums with their own money. If you offer a group coverage HRA (GCHRA)—also known as an integrated HRA—your employees can request reimbursement for out-of-pocket expenses only.

Since an HRA isn’t an account, employees can’t withdraw funds for medical expenses like an HSA. They must first incur the expense and then request reimbursement. No matter the type of HRA you offer, you can only reimburse employees for items listed in IRS Publication 502 or the CARES Act.

Step 3: Employees submit proof of incurred expenses

Next, after employees make their purchases, they’ll submit documentation showing proof of the incurred expenses they’re submitting for reimbursement.

This documentation must include the following:

• The name of the item or service
• The cost of the item or service
• The name of the vendor
• The date of purchase

Invoices, receipts, or an explanation of benefits from an insurer or healthcare provider typically satisfy this requirement. Depending on the item your employee requests reimbursement for, a doctor’s note or prescription may also be necessary under IRS regulations. Remember that this information is subject to HIPAA privacy rules, so you must handle it carefully if you’re self-administering your HRA or coming into contact with documentation.

Step 4: Review and reimburse expenses

Finally, employers will review the expense and approve or reject the request. If you reject a reimbursement request, you must follow the declined claims and appeals process guidelines outlined in your HRA plan documents.

If you administer your HRA with PeopleKeep, our experts will review your employees’ submissions for you so you can be sure they qualify and follow IRS guidelines. You’ll reimburse your employees up to their accrued allowance if it's a qualified expense.

Typically, employers choose to reimburse employees through payroll by adding a non-taxable line item to employees’ paychecks. But, you can also pay out HRA funds through a separate check, cash, or bank transfer.

What types of HRAs can I offer?

No matter your organization’s size, budget, or group health insurance status, there’s an HRA that will work for your needs. Let’s review the most common types of HRAs available.

Qualified small employer HRA (QSEHRA)

The qualified small employer HRA (QSEHRA), sometimes called the small business HRA, is an HRA Congress created specifically for small businesses and nonprofits with fewer than 50 full-time equivalent employees (FTEs). It allows you to reimburse employees for out-of-pocket expenses and insurance premiums.

Unlike other types of HRAs, your employees can get tax-free reimbursements if they have any type of MEC coverage. This includes individual health insurance coverage and coverage through a parent’s or spouse’s group health insurance plan.

You must offer a QSEHRA to all W-2 full-time employees, but you can choose whether or not to extend it to part-time employees. You can’t offer the QSEHRA if you offer a group plan of any kind. If you want to offer a QSEHRA instead of a group plan, you’ll need to cancel your group plan before the benefit takes effect.

If you offer an unaffordable QSEHRA allowance to an employee, they can still receive premium tax credits on the health insurance marketplaces. But, they must reduce the amount of their credit by their QSEHRA allowance. If your employee has an affordable allowance, they can’t collect any tax credits.

The IRS sets maximum annual contribution limits annually for the QSEHRA.

Individual coverage HRA (ICHRA)

The individual coverage HRA (ICHRA) works for employers of all sizes. Employers may offer an ICHRA as a stand-alone benefit or as an alternative health benefit to employee classes that don’t qualify for your group health insurance plan. It allows you to reimburse employees for out-of-pocket expenses and individual health insurance premiums.

One of the most significant advantages of an ICHRA is that it offers employers the ability to differ allowances and benefit eligibility with 11 employee classes, such as full-time or part-time workers.

Employees must have an individual health insurance policy with MEC to participate in the benefit. Unlike a QSEHRA, employees can opt out of an ICHRA. This largely depends on affordability and premium tax credits. If your employee’s ICHRA allowance is affordable, they can’t collect premium tax credits, even if they opt out of the benefit. However, if you offer an unaffordable allowance, your employee can opt out of the ICHRA and collect their premium tax credits.

Also, unlike a QSEHRA, ICHRAs have no maximum contribution limits, meaning you can offer as much as you’d like in allowances.

If your organization has 50 or more FTEs, the ACA considers you an applicable large employer (ALE). This means you must offer affordable health insurance coverage to at least 95% of your full-time employees or face a penalty. Offering an affordable ICHRA allowance to your employees can help you satisfy the ACA’s employer mandate instead of offering a group health insurance plan.

Group coverage HRA (GCHRA)

The integrated HRA, also known as a group coverage HRA (GCHRA), works as a supplement to group health insurance to cover out-of-pocket expenses your group plan doesn’t fully pay for. This includes expenses before your employees meet their deductibles, coinsurance, and copayments.

Only employees enrolled in your group plan can participate in a GCHRA. You can further customize your GCHRA allowances and eligibility with seven employee classes.

This is an excellent way to enhance your existing benefits package or reduce employee out-of-pocket costs if you offer a high deductible health plan (HDHP).

Excepted benefit HRA (EBHRA)

The final type of HRA for employees is the excepted benefit HRA (EBHRA). This allows employers to reimburse employees tax-free for excepted benefit expenses, such as dental or vision expenses. You must offer employees a group health insurance plan for them to participate, but they don’t have to enroll.

How do you manage an HRA?

When managing an HRA, you generally have three options:

• Self-administration
• Using a third-party administrator (TPA)
• Using an administration software solution

While self-administration may be appealing to small and mid-sized organizations, there are downsides. With self-administration, the employer takes on all responsibilities of managing their health benefit without any outside help. This means your organization is on its own when navigating compliance with the Internal Revenue Service, HIPAA, ERISA, and the ACA. Improper administration could result in fines or breaches. You’ll also need to draft plan documents on your own or hire an attorney, which can get expensive.

To avoid that risk, many employers contract with a third-party administrator. This is someone who can manage your benefits for you. However, that also means giving up control over your benefits to an outside source.

Your final option is to use an administration software platform like PeopleKeep.

How PeopleKeep can help

If you’re attracted to the control self-administration gives you but you’re wary of compliance and time-consuming administration, PeopleKeep’s administration software solution and award-winning customer support are a great choice. Our experts generate your legal plan documents, verify employee expenses per IRS guidelines, and automatically send required notices so you don’t have to.

Unlike working with a TPA, our software simply acts as a support system for self-administrators, so you always maintain ownership of your benefit design and decision-making process.

At PeopleKeep, we can help you offer and manage the following types of HRAs:

• The QSEHRA
• The ICHRA
• The GCHRA

When you offer a QSEHRA or ICHRA with us, your employees can shop for health insurance and ancillary coverage from their PeopleKeep accounts. Plus, our in-house benefits specialists are available to help.