Do Health Reimbursement Arrangements Work and How to Set One Up?

7 minute read

Health reimbursement arrangements (HRAs) are fringe benefit programs employers can use to help their employees pay for out-of-pocket medical expenses. In some cases, HRAs are even built to help employees afford insurance coverage when the business doesn’t sponsor a group health plan of its own.

HRAs have been around for some time, but throughout the past decade, their popularity has waxed and waned as IRS guidance changed. Today, they are more accessible to businesses than ever before. Let’s review what has changed and see how businesses can benefit from their use.

How Do HRAs Work?

Each HRA may look a bit different, but here’s how most tend to work:

  1. The employer determines how much they are willing to spend on medical expense reimbursements for each employee.
  2. Employees incur health care expenses and pay those expenses with after-tax dollars.
  3. Employees submit reimbursement requests.
  4. The employer reviews, approves and pays out reimbursement requests up to each employee’s maximum allowance.

The reimbursements are tax-free benefits; they are deductible to the employer, are not taxable to the employee and are not subject to payroll tax.

History of HRAs

HRAs were formalized in 2002 when the IRS released official guidance on them. At the time, businesses could use HRAs to reimburse employees for medical expenses and/or individual insurance premiums, and HRAs could be used in conjunction with a health care plan or as a stand-alone plan. Those payments were deductible to the business and not taxable to the employees.

When Congress enacted the Affordable Care Act (ACA), they placed new coverage requirements on health insurance plans. Stand-alone medical reimbursement plans like HRAs were in violation of the ACA, even if employees used HRA funds to purchase coverage that did comply with ACA guidelines. This prevented businesses from using HRAs to help reimburse employees for purchasing outside coverage in lieu of offering their own.

This restriction was partially lifted in 2016 when Congress passed the 21st Century Cures Act. This legislation created a special type of HRA called a qualified small employer HRA (QSEHRA) that allowed small employers to use HRAs as stand-alone benefits. This meant QSEHRAs could reimburse employees for out-of-pocket medical expenses and for purchasing outside medical premiums (either privately or via the ACA marketplace).

But the changes didn’t stop there. IRS regulations that were finalized in 2019 created two new types of HRAs: the individual coverage HRA (ICHRA) and the excepted benefit HRA (EBHRA). ICHRAs operate much like QSEHRAs but are available to businesses of any size. EBHRAs cover only “excepted” benefits like copays, deductibles, premiums for vision and dental insurance, long-term care and COBRA insurance premiums. Some of the previous restrictions placed on HRAs (like the requirement to cap allowances for each participant) were also lifted with these new regulations, which made HRAs more accessible to almost all businesses.

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Types of HRAs

Today, there are a few types of HRAs businesses can choose from. Let’s explore what they are, how they can be used and what businesses will benefit from their use.

Integrated HRA

An integrated HRA, also known as a group coverage HRA or a standard HRA, is one that is used to supplement a group health insurance plan. Typically, integrated HRAs are used alongside high-deductible group health plans. They reimburse employees for deductibles and other IRS-approved out-of-pocket medical expenses, up to a predetermined amount each year. This benefit is fully paid for by the business, is deductible to the business and is nontaxable to the employee. The catch? Integrated HRAs cannot cover individual health insurance premiums.

Individual Coverage HRA (ICHRA)

Individual coverage HRAs (ICHRAs) can be used as a stand-alone benefit or as a supplement to a group health insurance plan, and they are available to businesses of all sizes. This type of plan works well for businesses that don’t offer group health insurance plans to all employees as it allows the business to help pay for their employees’ health insurance. ICHRAs can cover both medical expenses (like deductibles and copays) and premiums on coverage their employees purchase privately or from the ACA marketplace.

Additionally, ICHRAs can be selective between classes of employees. For example, if the business offers group health insurance policies to one class of employees, they can offer an ICHRA to the remaining employees to help them obtain outside insurance.

Qualified Small Employer HRA (QSEHRA)

Qualified small employer HRAs (QSEHRAs) are a lot like ICHRAs, but they are only available to businesses with fewer than 50 full-time employees that don’t have group insurance policies. QSEHRAs establish a maximum benefit per employee, and throughout the year, employees can submit insurance costs for reimbursement up to those maximums. Like other HRAs, these costs are deductible to the business and nontaxable to the employee.

Excepted Benefit HRA

Excepted benefit HRAs (EBHRAs) help employees supplement their existing coverage. Most often, EBHRAs set aside funds for employees to spend on vision or dental coverage (which is not typically covered by group health care plans), but EBHRAs will cover any “excepted” costs, which may include:

  • Coinsurance and copayments
  • Deductibles
  • COBRA premiums
  • Vision and dental coverage (if not covered by existing health insurance plan)
  • Premiums for short-term insurance
  • Disability insurance

EBHRAs can only be offered to employees who are eligible for group health plan coverage.

Tax Planning Using HRAs

HRAs are a great fringe benefit to offer employees, and businesses will be rewarded for doing so. Eligible payments made under an HRA are deductible to the business and nontaxable to the employee. The employee will not need to include those benefits as income and will therefore not need to pay income taxes on their benefit.

HRAs do require some compliance efforts, but the cost is often worth it for businesses that want to offer financial support to their employees. Businesses interested in sponsoring an HRA should talk to their tax advisor to see how tax planning can be done to implement one of these plans and how it could affect their bottom line.

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