Health Reimbursement Arrangement (HRA)
A Health Reimbursement Arrangement (HRA) is an employer-funded, tax-advantaged health benefit plan that helps employees pay for out-of-pocket medical expenses. HRAs are sometimes also referred to as Health Reimbursement Accounts. Here, the employer contributes money towards an account that the employees can use to cover qualified healthcare costs, which may include deductibles, copayments, coinsurance, and other out-of-pocket medical expenses. Crucially, HRAs are not health insurance plans but a mechanism to help employees manage their healthcare expenses.
Types of HRAs
There are several types of HRAs, each designed to cater to different scenarios and employee needs. Below are the most common types:
1. Group Coverage HRA
This type of HRA is offered in conjunction with a group health insurance policy. The employer sets aside a specific amount of money for the HRA, which employees can use to reimburse eligible medical expenses not covered by their primary health insurance. This can help in covering high deductibles or other out-of-pocket costs.
2. Qualified Small Employer HRA (QSEHRA)
This option is available to small employers who have less than 50 full-time employees and don’t offer a traditional group health plan. With QSEHRA, employers can provide a tax-free reimbursement to their employees for medical expenses, including premiums for personal health insurance policies. Each year, the IRS sets a maximum contribution limit for QSEHRAs.
3. Individual Coverage HRA (ICHRA)
Launched in January 2020, ICHRA allows employers of any size to offer tax-free reimbursements to employees for individual health insurance policies and other medical expenses. ICHRAs are highly flexible and can be tailored to different classes of employees—such as full-time, part-time, and seasonal workers.
4. Integrated HRA
Similar to Group Coverage HRA, Integrated HRAs are specifically designed to integrate with other group health plans that adhere to Affordable Care Act (ACA) standards. This type can help meet ACA requirements while providing additional healthcare benefits to employees.
5. Retiree-Only HRA
This HRA is designed exclusively for retired employees. The funds in this type of HRA can be used to pay for a wide range of medical expenses, including certain insurance premiums after retirement.
6. Standalone HRA
This traditional form of HRA is not tied to a high-deductible health plan or any other insurance plan. However, due to ACA regulations, standalone HRAs are less common today because they do not comply with ACA market reforms when offered to active employees.
How HRAs Work
Employer Contributions
The employer determines how much to contribute to the HRA annually. This amount can be flexibly adjusted based on the company’s financial situation and employee healthcare needs. Contributions to the HRA are made solely by the employer; employees do not contribute to this account.
Reimbursement
Employees incur medical expenses and then submit claims for reimbursement from their HRA. Typically, employees need to provide proof of the expense, such as receipts or invoices, and sometimes a statement showing that the cost has not been covered by insurance. Reimbursements are usually tax-free for the employees.
Rollovers
One of the attractive features of many HRAs is the possibility of rolling over unused funds into the next year. However, this depends on the employer’s policy. Some companies allow full rollovers, some allow partial, and others may have a “use it or lose it” policy where any unused funds at the end of the year are forfeited.
Portability
Most HRAs are not portable, meaning that if an employee leaves the company, they lose access to the remaining funds in the HRA. However, specific rules regarding portability can vary depending on the type of HRA and company policy.
Advantages of HRAs
Tax Benefits
HRAs provide significant tax benefits for both employers and employees. Employer contributions to HRAs are tax-deductible for the company, and reimbursements are generally not considered taxable income for employees.
Cost Control
Employers can better control health benefit costs through explicit annual contributions to HRAs and can adjust these amounts based on financial performance and healthcare cost trends.
Employee Satisfaction
Offering an HRA can significantly boost employee satisfaction by reducing out-of-pocket healthcare costs. This additional healthcare support can be a crucial factor in attracting and retaining talent.
Flexibility
HRAs offer remarkable flexibility both for employers and employees. Employers can design the HRA to meet the specific needs of different classes of employees. Employees benefit from having a dedicated fund to cover a wide range of medical expenses.
Disadvantages of HRAs
Complexity
The rules and regulations surrounding HRAs can be complex. Employers need to understand the limits and requirements of each type of HRA to ensure compliance and to make the most of the benefits for their employees.
Not a Substitute for Health Insurance
While HRAs provide financial support for medical expenses, they are not a substitute for comprehensive health insurance. Employers offering HRAs often need to provide or ensure other health insurance plans are in place.
Non-portability
In most cases, employees cannot take the HRA funds with them if they leave their job, which can be a downside for modern, mobile workforces.
Dependent on Employer
The existence and benefits of an HRA are entirely dependent on the employer. Changes in company financials or policy can affect the contributions and benefits available.
Compliance and Regulations
HRAs are subject to various federal regulations, including:
Affordable Care Act (ACA)
The ACA imposes certain requirements on HRAs, especially concerning coverage and annual limits. HRAs offered to active employees must be integrated with other qualifying health plans to comply with the ACA.
ERISA
The Employee Retirement Income Security Act (ERISA) governs most HRAs, especially those offered by private-sector employers. Employers need to ensure their HRAs meet ERISA’s fiduciary responsibilities, reporting, and disclosure requirements.
IRS Regulations
The Internal Revenue Service (IRS) sets forth rules regarding the tax benefits associated with HRAs, including annual contribution limits for types such as QSEHRAs and ICHRAs.
Key Considerations for Employers
When implementing an HRA, employers should consider several factors to optimize the benefit:
Eligibility
Determine which employees will be eligible for the HRA. This decision can be based on employment status, job function, or other criteria.
Contribution Limits
Decide on the annual contribution amounts. Employers should balance the need to provide meaningful financial support with the company’s budget constraints.
Rollovers and Forfeitures
Establish policies regarding the rollover of unused funds and forfeiture conditions. Clear communication on these policies is crucial to manage employee expectations.
Eligible Expenses
Define what types of medical expenses are eligible for reimbursement. While some employers stick to IRS-qualified medical expenses, others might include additional categories based on their workforce’s specific needs.
Administration
Consider whether to administer the HRA in-house or through a third-party administrator. Given the complexities involved, many employers opt for third-party administrators to manage claims and compliance.
Conclusion
Health Reimbursement Arrangements offer a valuable solution for employers looking to provide flexible, tax-advantaged health benefits to their employees. They can help manage out-of-pocket medical costs and serve as an essential tool in a comprehensive employee benefits package. However, the successful implementation and management of an HRA require a thorough understanding of the various types, regulatory requirements, and potential advantages and disadvantages. By carefully considering these factors, employers can design an HRA that meets their objectives and enhances their employees’ overall health and well-being.