As a business owner, finding a health insurance plan that is affordable for both the company and employees, that also provides adequate coverage for employees’ medical needs, might feel like threading an infinitesimally small needle. But there is a way. You can offer your employees a Health Reimbursement Arrangement (HRA) in addition to a low-cost group plan as a way to help pay for their out-of-pocket costs, or in lieu of a group plan as a way to help them buy their own health insurance in the private market.

Both uses of an HRA can benefit the business and the employees. Let’s examine how.

What is an HRA?

An HRA is an employer-funded account from which employees can reimburse for qualified medical expenses. Unlike other medical reimbursement and savings accounts like Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs), employers have almost complete control over how they design their HRA plans. 

Employers choose:

• How much they will make available for reimbursement through the HRA, and when the account’s balance will be available

• Which medical expenses are reimbursable.

• For whom expenses can be reimbursed (i.e. does the HRA just cover employees’ expenses or can they reimburse for their spouse and dependents’ expenses as well).

• What happens to unused account balances at the end of the plan year.

• Whether or not the employee must meet their health plan deductible first before they can reimburse through the HRA.

There are many types of HRAs, but the most common types employers offer are: Standard or Integrated HRAs, Post-Deductible HRAs, Individual Coverage HRAs (ICHRAs), Qualified Small Employer HRAs (QSEHRAs), Excepted Benefit HRAs (EBHRAs), and Retiree Only HRAs. Each has slightly different rules for how they can be used.

Standard or Integrated HRAs

These are meant to be used in conjunction with a group health plan. In fact, an employee can only sign up for their employer’s Standard or Integrated HRA if they are enrolled in a group health plan (and must provide proof of this enrollment). It doesn’t have to be their employer’s group health plan (it can be a group health plan offered by their spouse’s employer), and it doesn’t have to be a specific type of health plan, it just has to be considered group coverage. This rule applies to anyone for whose expenses are being reimbursed through the HRA (e.g. employees’ spouses and dependents). Contributions to Standard or Integrated HRAs can’t be used to pay for health insurance premiums, but they can be used to pay for a long list of qualified medical expenses. Employers can also choose to offer a Standard Dental and Vision HRA that is specifically designed to help employees pay for out-of-pocket dental and vision expenses.

Post-Deductible HRAs (PDHRAs)

A Post-Deductible HRA (PDHRA) is an employer-sponsored, employer-funded account through which employees can reimburse for medical expenses on the IRS Section 213(d) list, including coinsurance obligations, co-pays and expenses that would count toward their medical deductible. The list of eligible expenses can be customized by the employer. What makes these types of HRAs different from the other types of HRAs is that the employee must spend a certain amount out-of-pocket before they can reimburse for expenses. The amount they must spend is referred to as the HRA’s deductible. 

Individual Coverage HRAs (ICHRAs) 

These were created so employers could give employees a way to buy their own health insurance plan in the private market. These HRAs can be used to pay for monthly health insurance premiums as well as out-of-pocket costs. Employers can choose the amount they contribute as long as it meets minimum essential coverage standards set by the Affordable Care Act (ACA). 

Qualified Small Employer HRAs (QSEHRAs)

These also provide a way for employers to give their employees money to purchase their own health insurance plans in the private market. Like with ICHRAs, these HRAs can be used to pay for monthly health insurance premiums as well as out-of-pocket costs, and employer contributions must meet minimum essential coverage standards set by the Affordable Care Act (ACA).

Expected Benefits HRAs (EBHRAs)

These HRAs are intended to be used to cover health insurance premiums and qualified medical expenses associated with dental and vision care. The IRS sets annual limits for this type of HRA.

Retiree Only HRAs

These HRAs provide employers a way to cover medical costs for employees who have retired from their company.

To learn more about different types of HRAs and how they can benefit your business and employees, consult Lively’s HRA Guide.

How can it differ from traditional group coverage?

Standard or Integrated HRAs must be offered in conjunction with employer-sponsored group health insurance coverage and EBHRAs can be offered in conjunction with employer-sponsored health plans (or they can be offered on their own). They can augment the group plan’s coverage by giving employees a way to pay for out-of-pocket medical expenses.

But ICHRAs, QSEHRAs, and Retiree Only HRAs are offered instead of group health plans. So instead of the employer deciding which health plan or health plans it wants its employees to choose from, the employer says, “Here is an allowance that you can use to purchase the plan that works for you in the private market.” It can be a way to give employees more choice and flexibility in their health insurance coverage.

What are the benefits?

There are many benefits to both the employer and employee in offering an HRA. 

Benefits to the employer include:

1. Containing health insurance costs. If employers choose the Standard or Integrated HRA, they can pair it with a low-cost health plan like a High Deductible Health Plan (HDHP), which typically has the lowest monthly premiums of the health plans, while also giving their employees a way to pay for the higher deductible and other out-of-pocket costs. Employers set their budget and allocate the amount that makes financial sense to each account. If employers choose an ICHRA, QSEHRA or Retiree Only HRA, they choose the amount they will contribute based on their budget and ACA standards, instead of being surprised every year by annual price increases.

2. Tax breaks. Employer contributions are tax deductible.

3. A healthier workforce. Employees that have a way to pay for out-of-pocket medical expenses are more likely to get the care they need. Which will help to keep them healthy. And a healthier workforce is a more productive workforce.

4. Accounts don’t have to be prefunded. This gives you flexibility from a cash flow perspective.

5. If employees leave the company, the company absorbs any unused funds.

Benefits to the employee include:

1. Tax-free money to pay for out-of-pocket medical expenses. Employer contributions are tax-free to employees.

2. More flexibility and choice in how their healthcare dollars are spent. HRAs support employee choice and empower them to make the best financial and healthcare decisions for them. Standard or Integrated HRAs allow employees to choose a lower cost health insurance plan but still remain covered for a high deductible and ICHRAs and QSEHRAs give employees a way to handpick the health insurance plan that makes the most sense for them while giving them a way to pay for it as well.

3. Improved physical, mental and financial health. Employees are more likely to be physically healthy because they have a way to pay for the care they need, HRAs can reduce stress associated with rising medical costs because they have a way to pay for them, and HRAs can improve financial health because they create a financial safety net from which employees can draw when they need to.

Are there any disadvantages?

While HRAs can be a powerful tool businesses can use to help support their employees, they’re not right for every situation. Here are some drawbacks to using an HRA instead of another type of medical spending or saving account like an FSA or HSA.

1. Only employers can contribute. This becomes a drawback if the employer’s contribution budget isn’t big enough to adequately support employees’ needs. In this case, it might be more beneficial to offer another type of account into which employees can contribute their own tax-advantaged dollars.

2. HRAs are subject to non-discrimination testing and might come with extra reporting requirements per ERISA.

Is it right for my business?

The best benefits for the employees of your business sit at the intersection of affordability and adequate coverage. To find that intersection you must first determine your budget for benefits. Then, determine the needs of your employees. You can do this in several ways including employee surveys and audits of previous year’s benefit utilization. Then ask your benefits broker for all of the options available to meet these needs including HDHPs, HRAs, HSAs and FSAs.

Compare your options, employees needs and your budget to determine the best benefits mix to please all of those masters.

Get started with Lively today

Lively is your partner in offering the best benefits mix for your budget and your people. We provide a wide number of flexible benefits solutions in addition to top-rated customer service. Our thoughtfully designed, easy-to-use products are paired with year-round support for employees and admins. If you’re looking to uplevel your benefits, reach out to Lively today.