A Health Reimbursement Arrangement (HRA) can also be known as a Health Reimbursement Account. It is an employer-funded, IRS-approved, tax-advantaged health benefit.
An HRA can be structured to reimburse some expenses not covered by health insurance, such as a portion of your employees’ group medical plan deductible, and/or coinsurance, and/or co-pays.
In some circumstances, an HRA can also be set up by a small business to help employees pay individual health insurance premiums.
How Health Reimbursement Arrangements Work
Not to be confused with health insurance, an HRA reimburses employees for individual health insurance premiums, or out-of-pocket medical expenses on a group medical plan. To provide a reimbursement, the employer makes contributions to the employee’s account, or reimburses the employee for medical expenses incurred.
There are limits on how much employers can contribute to certain HRAs. For a Small Business HRA, annual employer contributions have a cap for each employee. The cap may be different for employees who are single compared to employees with families.
Eligible expenses in a Health Reimbursement Arrangement are all qualified medical expenses under Section 213 of the Internal Revenue Code, including personal health insurance premiums. However, employers may restrict reimbursable expenses under their own HRA plan, within IRS guidelines.
HRA Benefits to Employers
HRAs are often provided in conjunction with high-deductible health insurance plans that have lower premiums, which saves an employer money. In addition, all employer contributions to HRAs are 100% tax-deductible for the employer and tax-free for the employee.
Health Reimbursement Arrangements are flexible plans that allow employers to provide valuable employee benefits while controlling costs.
What is a QSEHRA?
Also known as a small business HRA, the QSEHRA was established in 2016 as a quicker, more efficient HRA that allows small business to offer a standalone HRA.
The QSEHRA does have a few setbacks, such as limits on how much employers can reimburse their employees and less flexibility than the Individual Coverage Health Reimbursement Arrangement (ICHRA) in offering different allowances to various classes of employees. QSEHRAs also restrict organizations from offering a group health plan as well, such as a flexible spending account (FSA) or SHOP coverage.
Nonetheless, if your employees have a wide array of health insurance policies and situations such as short-term, sharing ministries, Medicare, or utilizing a spouse’s or parent’s plan, a QSEHRA might be of more value to your team than an ICHRA.
How does a QSEHRA work?
As a small business, you can set up a QSEHRA at any time. You’ll need to set your employees’ annual reimbursement allowances under the legal limitations outlined by the IRS each year. You can also offer different allowance amounts based on employee age and family size.
Once employees incur medical expenses like premiums, copays, and deductibles, they can submit a claim for reimbursement approval up to their monthly allowance and/or set up a recurring claim.
Reimbursements from the employer are payroll-tax-free and 100% tax-deductible. Employers can allow QSEHRA allowances to roll over each month and/or each year for their employees, so long as the reimbursements made never exceed the annual limit.
Full-time employees and their families are automatically eligible for QSEHRA reimbursements, and as the employer, you can determine whether you want to extend eligibility to your part-time employees as well. Keep in mind, your reimbursement allowances cannot differ between part-time and full-time employees with a small business HRA. Only participating employees with the minimum essential coverage (MEC) can receive their reimbursements tax-free.
QSEHRA plans offer many small businesses and their employees a number of benefits.
QSEHRA Benefits for Employers
- Cost Control: You set employees’ reimbursement allowances up to your organization’s maximum limit each year so you never go over budget.
- Attract & Retain Top Talent: Offering QSEHRAs as a small business helps you stand out in the industry while attracting and retaining top candidates.
- Payroll Tax Benefits: All reimbursements are tax-free for employers, and reimbursements are also 100% tax-deductible for employers.
QSEHRA Benefits for Employees
- Income Tax Benefits: Participating employees with MEC are eligible for income-tax-free reimbursements.
- Delivers More Value: No matter if they are on a spouse’s plan, a sharing ministries plan, or even a short-term plan, employees can receive reimbursements through the QSEHRA plan.
- Plan Flexibility: Employees have the freedom to choose the individual health plan that fits their lifestyles.
- Cost Savings: QSEHRAs help to reduce out-of-pocket costs for eligible employees.
In the summer of 2019, an Executive Order was released to offer more flexibility and budget control for businesses and organizations of all sizes through the Individual Coverage Health Reimbursement Arrangement (ICHRA), an HRA option first offered on January 1, 2020.
What is an ICHRA?
As briefly mentioned above, an ICHRA is an ACA-compliant federal ruling that allows companies to reimburse employees for their individual health insurance through a monthly, tax-free allowance.
With ICHRAs, you can choose how to distribute your funds, whether on an individual basis or based on various classes (i.e., full-time, part-time, seasonal employees, geographical location, etc.).
Any business, non-profit, organization, etc., with at least one W-2 employee that does not already offer a QSEHRA or an Excepted Benefit Health Reimbursement Arrangement (EBHRA) can offer an ICHRA to their employees.
Employers cannot offer both an ICHRA and a QSEHRA because the former is considered a group health plan, and thus, is not compatible with the latter. An ICHRA and an Excepted Benefit Health Reimbursement Arrangement (EBHRA) can both be offered by the same employer, but not to the same class of employees. This is because EBHRAs must be offered with a traditional group plan.
Unlike the QSEHRA contribution limitations, the ICHRA offers businesses the flexibility to choose how much they contribute to individual monthly premiums and out-of-pocket medical costs for each 12-month plan year. There is neither a minimum nor maximum annual contribution requirement you must meet with this type of HRA nor a minimum participation requirement.
How does an ICHRA work?
Under an ICHRA plan, employers determine each employee’s or class reimbursement allowance. Employees then opt to purchase an individual health plan of their choice (ICHRAs can also reimburse Medicare plans, either Part A and B or Part C) and pay for their own insurance premiums and medical expenses.
Employees can submit claims for their medical costs like copays and deductibles for employer reimbursement up to their allowance amount. Employers only pay funds after they have approved an employee’s reimbursement claim, and all reimbursements are payroll and income-tax-free. Unused allowances accrue from month to month; however, any unused funds at the end of the year are kept by your company or organization. You have the option to carry over those funds or reset them annually.
To best strategize contributions and group health benefits overall, employers can offer different classes of employees different group health plan options. For example, an employer can offer ICHRA to full-time employees and a traditional HRA to part-time employees, but no one employee or class of employee can receive both plan options.
There are several benefits of incorporating ICHRA plans into your overall group benefits package for both employers and employees.
ICHRA Benefits for Employers
- Great for All Company Sizes: Unlike the QSEHRA, an ICHRA is not limited to companies with 50 or fewer employees.
- Cost Savings: With an ICHRA in place, you don’t have to provide a traditional healthcare plan.
- Control of Costs: Employers pre-define their allowance budgets for each employee or class of employees.
- Flexible Plan Options: Design and strategize your health plan with no minimum contribution requirements or participation requirements.
- Tax Benefits: All reimbursements given to employees are tax-free and are 100% deductible as a business expense.
- Attract & Retain Top Talent: By offering more flexible health coverage options and reimbursements, your company can attract and retain high-quality candidates.
- ACA Compliance: These plans meet ACA requirements such as minimum essential coverage, affordability, and minimum value.
ICHRA Benefits for Employees
- Cost savings: Reimbursements from employers help make individual health plans more affordable for employees.
- Tax Benefits: Health insurance premiums under an ICHRA are tax-free.
- Flexible Plan Options: Employees have the freedom to select an individual health insurance policy that best suits their needs.
- Transferrable Plans: Because the individual purchases his/her own plan, they can take the health plan with them if they change careers.
- Quick & Easy Reimbursements: The process to submit a claim and receive reimbursement for eligible medical expenses is quick and easy.