Health Reimbursement Arrangement (HRA): Meaning, How It Works, Types, Pros & Cons

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Employers are left wondering how they can provide a powerful and individualized health benefit to be competitive in today’s labor market without going over budget or dealing with the nitty-gritty of compliance as healthcare costs rise substantially each year. A health reimbursement arrangement allows companies of any size to deliver a cost-controlled health benefit that is more inclusive and specialized than the group health plan’s one-size-fits-all approach.

Here is a breakdown of the Health Reimbursement Arrangement (HRA) to aid in your understanding:

Table of Contents

What Is A Health Reimbursement Arrangement (HRA)?

A health reimbursement arrangement, often known as an HRA or health reimbursement account, is an additional benefit that businesses may provide to staff members in place of or in addition to employer-sponsored health insurance.

However, under an HRA, employees pay for medical expenses, which their employers subsequently reimburse them for up to a certain financial level. With tax-advantaged reimbursements offered by HRAs, employees receive money from their employers without it being considered income and without paying taxes on it. Employers might be permitted to roll over money from one year to the next, depending on the type of HRA. Employees may be reimbursed through HRA benefits for costs such as health insurance premiums, deductibles, and copayments.

How Does A Health Reimbursement Arrangement (HRA) Work?

Health reimbursement arrangements (HRAs) come in a variety of forms, and while they may change in appearance from one employer to the next, they all generally follow the same procedures.

The employer will compensate the employee up to the permitted per-employee amount if the expenses qualify for HRA reimbursement.
Companies decide on a specific sum of money that they would provide to each employee as reimbursement.
To receive reimbursement for their expenses, employees submit the required documentation to the employer.
Employees must pay out-of-pocket costs for their health, including premiums, deductibles, copayments, and other costs.

Employers may also decide to give staff members a debit card to use for paying medical bills in place of reimbursements. All expenses must still be eligible medical expenses for the money to be tax-free for the employees and tax-deductible for the employers.

What Does A Health Reimbursement Arrangement (HRA) Cover?

Any qualified medical expenses as specified by the Internal Revenue Service may be covered under health reimbursement agreements (HRAs) (IRS). A wide range of costs associated with the diagnosis, treatment, prevention, and management of diseases are included in the long list of eligible medical expenses. The cost of getting to and from medical treatment facilities is also considered a qualified medical expense. Even insurance premium costs may be covered through HRAs.

Types Of Health Reimbursement Arrangements (HRAs)

There are a few different types of health reimbursement arrangements.

1. Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

A qualified small employer health reimbursement arrangement (QSEHRA) is a program that provides health insurance subsidies to employees of companies with less than 50 full-time employees. A QSEHRA often referred to as a small business HRA, can be used to pay for medical bills that would otherwise go uninsured or to offset the cost of health insurance.

The Internal Revenue Service (IRS) determines the yearly caps (IRS). For 2022, an employer with a QSEHRA may reimburse single employees up to $5,450 a year and families up to $11,050 annually. The thresholds increase to $5,850 per person and $11,800 per family in 2023. For employees, the reimbursement is tax-free, and employers can deduct it from their taxes.

2. Individual Coverage HRA (ICHRA)

Since its launch in January 2020, Individual Coverage HRA (ICHRA) has only recently become a possibility. Individual health insurance premiums could not previously be paid with HRAs. However, starting in January 2020, the government will let companies give their staff a brand-new HRA called an individual coverage HRA in place of group health insurance.

These HRAs allow employees to purchase their own complete individual health insurance with pretax money on or off the Affordable Care Act’s health insurance marketplace. Personalized protection HRAs may also pay employees back for certain medical costs, including copayments and deductibles.

Whether or if your employer’s ICHRA satisfies minimal requirements for so-called “affordability” and whether you decide to opt-in or out of the coverage will determine whether or not you are qualified for a premium tax credit under the Affordable Care Act.

3. Excepted Benefit HRAs (EBHRA)

Additionally, companies that continue to provide standard group health insurance can provide Excepted Benefit HRAs (EBHRA) that allow staff members to receive reimbursement for up to $1,950 in eligible medical costs annually.

Even if they opt out of corporate health insurance, employees are still eligible to participate in an “excepted benefit HRA,” but they are not allowed to use the funds to purchase comprehensive health insurance. However, they may use the money to cover short-term medical costs, dental and vision insurance payments, and eligible medical expenses.

What Are The Pros and Cons Of Health Reimbursement Arrangement?

The benefits and drawbacks of HRA accounts are listed below.

Pros

Excellent for companies of any size: While the QSEHRA is only for companies with less than 50 employees, ICHRAs work with enterprises of all sizes.
Employees are free to select their providers and benefits.
Employees may receive reimbursements for the ICHRA at various rates depending on factors related to their jobs, such as full- or part-time status and location. The QSEHRA must be provided equally to all classes of employees, although it may be scaled based on factors like family size or age.
Employees may use HRAs to cover insurance premiums, medical costs, or both, depending on how they are designed.
Employees are qualified for a special enrollment period when their employer offers a QSEHRA or ICHRA. During this period, they can compare major medical plans available on the individual market.
Funds from unused HRA accounts may annually roll over at the employer’s option; otherwise, they remain with the employer. They also renew monthly.

Cons

Money cannot be moved; if an employee leaves the company, the money stays with the employer. The good news is that the worker keeps their health insurance, though!
In some cases, combining with a group plan is not possible. If your team has a tried-and-true group plan, they might be reluctant to abandon it.
The HRA may have contribution caps (QSHERA), which could prevent an employer from making the significant contribution they want.
Your staff won’t have as many options as they would like if the individual insurance markets in your location are weak.
Plans for sharing ministries are not eligible for the ICHRA, however, recently proposed regulations will help to clarify any confusion about QSEHRAs and sharing ministries. They won’t be regarded as health insurance, but they may be paid for as medical expenses. Good news indeed!

Final Remarks

Employers can use a tax-advantaged plan called a health reimbursement arrangement (HRA) to pay some authorized medical and dental expenses on behalf of their staff members. Up to a yearly cap set by the company, the employee may be compensated under the plan for expenses they incurred. Employee reimbursements are tax-free, and businesses can deduct their reimbursement costs from their taxes. An HRA for smaller businesses with less than 50 full-time employees is known as a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). Employees can purchase their health insurance using pretax money through an Individual Coverage HRA (ICHRA). Employees with an ICHRA are eligible to receive reimbursement for medical costs such as copayments and deductibles.

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