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What is a Health Reimbursement Agreement (HRA)

What is a Health Reimbursement Agreement (HRA)


If you're a small business owner, you may be looking for ways to stand out in the hiring process or to keep hard-working employees at your company. One of the ways to achieve this is to support your employees' health and well-being by providing small business health insurance, and this is where setting up an HRA (Health Reimbursement Arrangement) or HSA (Health Savings Account) comes in. 

Under the 21st Century Cures Act passed in 2016, small business owners now have more options and flexibility to help their employees pay for health insurance. They are no longer required to offer ACA-compliance group health insurance in order to provide their employees with HRA. But what is an HRA, and how do HRAs work?

If you're interested in setting up a medical HRA plan, we'll discuss how they work, the different types of HRAs, and how you can find the right plan for your employees. You might also be interested in knowing the difference between an HSA and an HRA.


What is an HRA plan?

Health Reimbursement Arrangements, or HRAs, are also known as Health Care Reimbursement Accounts. An HRA is an employer-sponsored group health plan. Under this plan, employees are reimbursed tax-free for eligible medical expenses and sometimes insurance premiums. Additionally, unused funds may be used at the employer's discretion the following year. Individual coverage HRAs are unlimited, meaning there are no set limits per plan type on how much an employer can spend on an HRA each year.


How does an HRA work?

In general, the HRA follows this simple process:

  • The employer will open an HRA account and choose the amount of medical subsidy to their employees on a tax-free basis. 

  • The employee can purchase a health plan that meets their needs. At this stage, the employer usually contributes little or nothing, but there may be non-reimbursable expenses. HRA money can be used to pay monthly premiums or personal expenses.

  • The employee will then present proof of purchase to the employer, including a description of the product or service purchased, its cost, and the date of purchase. This usually comes in the form of a receipt or an invoice.

  • If the claim is accepted, the worker will be reimbursed. For small businesses, the refund will usually be included in the employee's next pre-tax paycheck.

One thing to keep in mind is that employees receiving HRA contributions are generally not eligible for government subsidies when purchasing coverage through a government subsidy.


Types of HRAs

HRA for small qualified employers

It is one of the most popular HRAs among small business owners. A Qualified Small Employer HRA Plan (QSEHRA) allows small employers to provide tax-free reimbursement for certain healthcare expenses. Common examples include health insurance premiums and coinsurance. To qualify for this plan, a small business owner must have fewer than 50 full-time employees, provide equal benefits to each full-time employee, and not offer a group health plan, such as a flexible spending account (FSA). Employers can decide how much to contribute to their employee's medical expenses up to an annual limit set by the IRS.


Individual coverage HRA

Another option is individual coverage HRA (ICHRA). This plan has only been available for a few years, and a recent change has made it more attractive to small business owners. Now this individual plan can be used to cover your insurance premiums. Employees can use money from this plan to purchase their own individual health insurance with pre-tax dollars, which can help them save money on taxes. Additionally, employees can use this money to reimburse eligible healthcare expenses, including deductibles and copayments. This plan is more flexible than the HRA for qualified employers above.


Group Coverage HRA

Also called Excepted Benefit, HRA is a group HRA coverage that allows employers to supplement a group health insurance plan. This HRA is available to businesses of all shapes and sizes and is usually offered with health insurance policies. This type of plan is most popular with larger businesses but can also benefit smaller businesses. It is ideal for businesses that want to supplement an existing group health insurance plan.


HRA Account Rules

The HRA rules for employers and employees include some standard HRA rules associated with each HRA account. For example, the company owns the HRA, not the employee. Only the company can deposit money into the HRA, HRA funds do not earn interest, and the company determines the amount paid into the HRA. Employees can use HRA money to pay their personal and family medical bills. The rules for reimbursing an HRA are found in IRS Publication 502, and any unused money stays with the business. Transfer of funds is not guaranteed for HRA employees. The transfer depends on the type of HRA plan and the company's decision to allow it or not.

Some rules differ between HRA plans. For example, the QSEHRA (Qualified Small Employer Health Reimbursement Agreement) is suitable for small employers, while the ICHRA (individual coverage HRA coverage) is suitable for employers of all sizes.


Advantages and disadvantages of an HRA

There are always pros and cons to consider when choosing a health plan.

Here are some advantages and disadvantages of the HRA account.


Pros

  • Employees can use it for medical and dental bills, prescriptions, annual checkups, birth control medications, and more.

  • Employees select vendors and plans.

  • Funds with tax advantages for medical expenses

  • If an employee loses his job or resigns, he retains his health insurance.

  • Some HRA plans allow employees to use their HRA for insurance premiums.

  • Some HRAs allow a special enrollment period, which means it is easier for employees to enroll in health insurance within 60 days of the change.

  • Unused funds may be reinvested at the employer's discretion.


Cons

  • Employees cannot use it for cosmetic expenses such as teeth whitening or other unnecessary procedures or products. Again, this would be considered professional by most employers.

  • For some HRAs, the HRA offer may replace the premium tax credits that some people receive.

  • Funds remain with the employer if an employee leaves the company. Note: This is definitely an advantage for employers.

  • In some cases, employees of spousal plans may not be able to obtain reimbursement of spousal premiums.

  • Some HRAs are not part of joint health plans or TRICARE, among others.

  • The insurance market may limit provider options by geography.

  • Depending on the type of HRA offered, there may be limits on plan-based employer contributions.


How to Start an HRA for Small Qualified Employers

If you are interested in establishing this type of HRA, you must notify new employees in writing that you are establishing a plan and that they are eligible to participate. You need to think carefully about notifying your employees because you want to give them the option to choose coverage during an open enrollment period. Plan deductibles tend to reset on January 1, but your employees may also benefit from a special enrollment period, making it easier to change or select new health insurance.


Bottom Line

If you're a small business owner, an HRA can help you attract and retain talented employees by providing them with money they can use to cover certain medical bills. For more information on how to reimburse medical expenses for small businesses, talk to an accountant or legal or tax advisor.


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