HRAs 101: Guide to health reimbursement arrangements (HRAs)

What is a health reimbursement arrangement (HRA)?

Benefits of an HRA

Traditional group health insurance coverage isn’t the best option for many employers because of its complexity, unpredictable rate increases, and strict participation requirements. Offering HRAs to your employees instead has many benefits. Here are the most significant HRA features.

Accessible to all employers and budgets

An HRA is a more accessible alternative or supplement to group health insurance. Employers can set a monthly allowance that best fits their budget. Employees then request reimbursement for any qualified medical expenses they choose.

Key features:

• No need to pre-fund accounts
• No minimum participation requirements
• Employers’ monthly expenses are capped
• Only reimburse for incurred expenses

Flexibility for 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.

Key features:

• With a QSEHRA or ICHRA, employees choose their own individual health plans
• Employees can access the health services and products that matter most to them and submit reimbursement requests for those items

Tax advantages

HRAs provide significant tax benefits for both employers and employees, reducing the overall cost of offering and receiving health benefits.

Key features:

• Reimbursements are tax-free for employees
• Reimbursements are tax-deductible for employers

Improved retention and employee satisfaction

Offering an HRA helps organizations attract and retain top talent by showing employees that their health and well-being matter. Employees appreciate the personalized approach to healthcare benefits.

Key features:

• HRAs accommodate individual healthcare needs, increasing employee satisfaction.
• Employees value the flexibility and choice HRAs provide.

No wasted benefits spend

With traditional group health insurance, employers often pay premiums regardless of whether employees use the benefits. HRAs eliminate this waste by allowing employers to pay only for eligible expenses that employees actually incur.

Key features:

• Unused funds stay with the employer at the end of the plan year
• Funds do not transfer if an employee leaves the organization

Supports modern workforces

HRAs work well for remote and multi-state teams, as they accommodate employees in diverse locations. This flexibility is especially valuable in today’s hybrid and remote work environments.

Key features:

• Employees across different states can select health plans with provider networks available in their area.
• HRAs adapt to various employee needs and family statuses.

How does an HRA work?

With an HRA, employers offer their employees a tax-free monthly allowance for eligible health expenses listed in IRS Publication 502 and the CARES Act.

HRAs follow a simple, four-step process to provide employees with tax-free reimbursements for eligible healthcare expenses:

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.

You’ll decide:

• How much tax-free money you want to offer to employees each month
• Which expenses are eligible for reimbursement from IRS Publication 502
• Decide if you’d like to differ allowances by family status
• For ICHRA and GCHRA, decide if you’d like to offer different benefits or allowances to employees in different groups (classes)

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 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. 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.

Individual coverage HRA (ICHRA)

The ICHRA allows employers of all sizes to offer a flexible, customizable health benefit. Employers may offer an ICHRA as a stand-alone alternative to a group policy or as a health benefit for 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 allows employers to differentiate allowances and benefit eligibility among 11 employee classes, such as full-time or part-time workers.

Employees must have an individual health insurance policy with minimum essential coverage (MEC) to participate in the benefit. Employees who are eligible for premium tax credits can opt out of an ICHRA and collect those tax credits instead in specific circumstances. But if their allowance meets affordability thresholds, they can’t collect those tax credits, even if they opt out of the benefit.

If your organization has 50 or more full-time equivalent employees (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.

Qualified small employer HRA (QSEHRA)

The QSEHRA, sometimes called the small business HRA, allows small businesses and nonprofits with fewer than 50 full-time equivalent employees (FTEs) to offer a flexible health benefit. It allows you to reimburse employees for out-of-pocket expenses and insurance premiums.

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

If you offer a QSEHRA, you must offer it to all W-2 full-time employees. But, you can choose to extend it to part-time employees, too. 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 for the QSEHRA.

Group coverage HRA (GCHRA)

The integrated HRA, also known as a GCHRA or traditional HRA, works as a supplement to group health insurance. It allows employers to reimburse employees for out-of-pocket expenses the group plan doesn’t 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 classes of employees .

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 excepted benefit HRA (EBHRA) 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.

HRA pros and cons

HRA timeline: 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. Here’s how HRAs have evolved over the years:

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, which combines the best features of self-administration and using a TPA.

How PeopleKeep can help you administer your HRA

If you want 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 is a great choice.

We:

• Automatically generate your legal plan documents
• Verify employee expenses to ensure IRS and HIPAA compliance
• Send required employee notices

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.