Health Reimbursement Arrangements (HRA)
An HRA, also known as a health reimbursement arrangement or account, is an employer-funded medical reimbursement plan. HRAs are employer-designed and employer-funded plans that reimburse employees for eligible out-of-pocket medical expenses. HRAs are a major part of the growing trend toward greater consumer health care responsibility.
How HRAs work
There are several types of HRAs, and they provide flexibility for designing a benefit plan that meets the unique and diverse needs of the modern workforce. Employers can determine contribution levels, apply a "deductible" to be satisfied prior to accessing the HRA funds, and can even use an HRA to address specific deficiencies in their overall plan, by limiting contributions to specific medical expenses.
An HRA plan is subject to plan document requirements and non-discrimination rules, meaning everyone that is eligible should be offered the plan, and the benefits under the HRA cannot discriminate in favor of the highly compensated.
For a standard HRA covering medical expenses, the plan must be offered in conjunction with a group medical plan in order to satisfy regulations implemented from the Affordable Care Act. ICHRA, QSEHRA and excepted benefit HRA's are not subject to these requirements.
Benefits of HRAs
One of the biggest benefits of an HRA is that contributions are tax deductible to the employer and tax-free to the employee, so it's a win-win.
HRAs also provide a lot of flexibility because it's essentially self-funded by the employer. You can choose to fund claims after the employee pays the first few hundred dollars of their deductible instead of the employer paying the claims that are initially subject to the deductible. Employers can also set up different types of arrangements, like deciding to offer reimbursements on the frontend or backend of the employee's requirement (backend is often a better solution because they ensure the employee is still responsible for some costs), or an employer can decide to pay certain "large ticket" items like an ER visit while the employee pays for a regular office visit.
With an HRA the employer can cap the amount they are going to spend for each enrollee, each year. The employer can also set it up as "use it or lose it" each year or allow for some level of "carryover" to the next plan year.
Lastly, HRAs can sometimes be less confusing for employees, particularly if the plan design is simple, so you may get more participants.
The one drawback of an HRA is since employers have more control over the plan, there are added administrative and record-keeping needs. Employers who are subject to COBRA, will also be required to administer COBRA for certain HRA plans.
Which HRA is best for your organization?
Unlike HSAs there are several variations of HRAs that an employer can offer. This chart shows the differences between the most common HRAs.
| HRA §105, §106 | |
| Employer Eligibility | Any size employer, but must offer HRA with sponsor group health plan. |
| Employee Classes | All employees must participate unless under the plan they are excluded based on one or more of the excludable categories. |
| Classes Defined | Excludable Categories:
|
| Employee Eligibility | Any employee who is covered by a group medical plan sponsored by the employer. |
| Employer Contribution Limits | Set by employer |
| Eligible Expenses | Section 213(d) medical care expenses. |
| Section 125 Cafeteria Plan | No |
| FSA Compatible | Yes |
| HSA Compatible | Yes, if restricted to post-deductible or limited purpose. |
| COBRA | Yes |
| ERISA | Yes |
| Carryover Allowed | Yes |
| Cash-Outs Allowed | No |
| Section 105(h) Nondiscrimination Rules | Yes |
| Qualified Small Employer HRA (QSEHRA) §9831(d) | |
| Employer Eligibility | Employers with less than 50 FT/FTE that do not offer a traditional group health plan. An employer that provides a group health plan to current employees in an excludable category (see below) is not an eligible employer. |
| Employee Classes | All employees must participate unless under the plan they are excluded based on one or more of the excludable categories. |
| Classes Defined | Excludable Categories:
An employee must be offered the QSEHRA no later than the day after the date on which the employee ceases to fall within any of the excludable categories. |
| Employee Eligibility | All full-time employees are automatically eligible. Businesses can choose to extend eligibility to part-time employees. The employee’s insurance status does not affect their eligibility for the QSEHRA. Employees can participate whether they have an individual health insurance policy, a group policy from their spouse’s employer, an alternative health care solution such as a health care sharing ministry plan, or no insurance at all. Reimbursements are tax-free to the employee if the employee has minimum essential coverage (MEC) for the month in which the expense is incurred. |
| Employer Contribution Limits | 2022: $5,450 (single coverage) $11,050 (family coverage) |
| Eligible Expenses | Section 213(d) medical care expenses and individual coverage. Reimbursement of individual major medical health insurance premiums, as well as other Code §213(d) expenses incurred during the QSEHRA coverage period, is permitted. A QSEHRA may reimburse premium payments for coverage of a spouse or other eligible family member, including expenses paid through another employer’s plan. |
| Section 125 Cafeteria Plan | No |
| FSA Compatible | No (because employer cannot sponsor other group health plan). |
| HSA Compatible | Yes, if restricted to individual coverage and post-deductible. |
| COBRA | No |
| ERISA | A QSEHRA is excluded from the ERISA Title I, Part 7 group health plan definition. The rest of ERISA may apply to QSEHRAs, although this issue remains undetermined by an administrative agency or court. However, starting on January 1, 2020, individual coverage selected by the employee in the individual market and reimbursed by a QSEHRA will not be treated as a part of any employee welfare benefit plan for purposes of ERISA’s Title I, if the QSEHRA meets conditions in the final rule that was issued by the Treasury, DOL, and HHS. |
| Carryover Allowed | Yes, carryovers permitted. Total reimbursements in one year cannot exceed the annual maximum. A QSEHRA can have a run-out period for submission of claims incurred during the coverage period. |
| Cash-outs Allowed | Cash-outs are not permitted even on a taxable basis, and will disqualify a QSEHRA, causing all payments to all eligible employees to be taxable. |
| Section 105(h) Nondiscrimination Rules | No |
| Individual Coverage HRA (ICHRA) §54.9802-4 | |
| Employer Eligibility | Any size employer, but cannot offer group plan for those eligible for ICHRA. |
| Employee Classes | Must be offered on the same terms and conditions to all employees within a class, except that the benefit amount may increase based on age (maximum 3:1 ratio) or family size. Classes are determined at the common-law employer level (rather than on a controlled group basis). |
| Classes Defined |
|
| Employee Eligibility | An employee who has individual coverage (including Marketplace coverage, student health insurance coverage, catastrophic plans, individual health insurance coverage sold through a private exchange model, and grandmothered individual health insurance coverage). To integrate an ICHRA with Medicare, certain conditions must be satisfied. Employees eligible for the traditional group health plan are not eligible (excludes account-based plans and plans limited to excepted benefits). Uninsured employees, employees covered by health care sharing ministry plan, and employees covered under a spouse’s group health insurance policy cannot participate in the ICHRA. |
| Employer Contribution Limits | Set by employer |
| Eligible Expenses | Section 213(d) medical care expenses. Individual coverage (including Market-place coverage, student health insurance coverage, catastrophic plans, individual health insurance coverage sold through a private exchange model, and grandmothered individual health insurance coverage). If integrated with Medicare, may reimburse premiums for Medicare Part A, B, C, or D, Medigap policies, and other Section 213(d) medical care expenses (subject to the Medicare Secondary Payer rules). Short-term limited-duration insurance (STLDI), self-insured student health plans and coverage consisting solely of excepted benefits are not eligible for reimbursement. |
| Section 125 Cafeteria Plan | Employees’ premiums for individual coverage off Marketplace can be run through a cafeteria plan. ICHRA is considered a group health plan. As such, a health FSA may be offered alongside an ICHRA. |
| FSA Compatible | No, if the health FSA is considered to be a group health plan (because an employee cannot be offered both a traditional group health plan and an HRA integrated with individual coverage). |
| HSA Compatible | May be designed to be HSA compatible by reimbursing premiums only or limiting. reimbursement in accordance with HSA rules (i.e. no reimbursement until statutory deductible is met). Employees in the same class can be offered a choice between an HSA-compatible ICHRA and one that is not HSA-compatible. |
| COBRA | Yes, when ICHRA coverage lost due to a qualifying event. Not eligible for COBRA if an employee is no longer covered by individual health insurance coverage. |
| ERISA | Yes (but ERISA’s Title I will not apply to the individual coverage if it meets conditions in the final rule that was issued by the Treasury, DOL, and HHS). |
| Carryover Allowed | Carryovers permitted if allowed under the employer’s ICHRA plan. |
| Cash-outs Allowed | No |
| Section 105(h) Nondiscrimination Rules | Yes, HRA 105(h) non-discrimination testing rules apply when offering both premium reimbursement and 213(d) medical expense reimbursement. |
| Excepted Benefit HRA §54.9831-1 | |
| Employer Eligibility | Any employer must sponsor group health plan but cannot offer ICHRA to those eligible. |
| Employee Classes | Must be made available under the same terms and conditions to all similarly situated individuals. |
| Classes Defined |
|
| Employee Eligibility | A group of all similarly situated individuals as defined by the employer, but cannot be offer ICHRA and group must pass nondiscrimination rules under Code §105(h). |
| Employer Contribution Limits | 2022: 2023: |
| Eligible Expenses | Section 213(d) medical expenses but not premiums for individual health coverage, Medicare, or non-COBRA group coverage (premiums for coverage consisting solely of excepted benefits can be reimbursed). |
| Section 125 Cafeteria Plan | No |
| FSA Compatible | Yes |
| HSA Compatible | Yes, if reimburses only dental or vision expenses. |
| COBRA | Yes |
| ERISA | Yes |
| Carryover Allowed | Yes |
| Cash-outs Allowed | No |
| Section 105(h) Nondiscrimination Rules | Yes |
Administering your HRA
There are lots of details employers need understand when administering an HRA. You need to have required HRA Plan documents in place. These documents describe the terms and conditions related to the operation and administration of the HRA. An HRA is also subject to ERISA <LINK TO ERISA PAGE>, so this document must be in writing. Besides complying with ERISA your organization needs to ensure that you have safeguards in place to stay compliant with the IRS, HIPAA, COBRA and the Affordable Care Act (ACA).
Compliance is complex which is why most organizations use a third-party for HRA administration services. An HRA administration provider, like isolved, helps organizations stay on top of all the HRA administration details. If you’d like to learn more about isolved’s HRA administration, click here.