What is a health reimbursement arrangement (HRA)?

A health reimbursement arrangement (HRA) is a plan that's funded by the employer and reimburses employees for eligible medical expenses. In certain situations, it can cover health insurance premiums.

Think of it as a special piggy bank that the employer fills up for its employees’ healthcare needs. Unlike an actual piggy bank, however, an HRA is a formal arrangement that must comply with specific Internal Revenue Service (IRS) rules. It’s a way for employers to help cover their employees' healthcare costs without the administrative burden of a traditional group health plan.

How is an HRA different from an HSA or FSA?

With so many available healthcare accounts, it’s easy to get HRAs mixed up with health savings accounts (HSAs) and flexible spending accounts (FSAs). Let’s break it down:

• HRA: These plans are entirely employer-funded. Your company decides how much to contribute, and the funds can be used only for approved healthcare expenses.
• HSA: This is like a joint savings account for healthcare. Both the employer and the employee can contribute, and the funds are for the employee to keep, even if they leave the company. However, you can only have an HSA if you’re enrolled in a high-deductible health plan.
• FSA: This is more like a use-it-or-lose-it healthcare allowance. Employees contribute pretax dollars, and sometimes the employer chips in, too. However, if employees don’t use the funds by the end of the year, they might lose them.

How does an HRA work?

Think of an HRA as a reimbursement program. Here’s how it typically plays out:

1. The employer sets up the HRA and decides how much to contribute for each employee.
2. An employee incurs a qualified medical expense and submits proof of the expense to the HRA administrator.
3. The HRA administrator reimburses the employee from the HRA funds.

It’s important to note that employees can't contribute to an HRA fund. It’s all employer-funded, meaning that it’s essentially free money for employees.

Choosing the right type of HRA

Not all HRAs are made equal, so it’s important to know what types are available and whom they’re best for:

• Individual coverage HRA (ICHRA): allows businesses of any size to reimburse employees for individual health insurance premiums and other medical expenses.
• Qualified small employer HRA (QSEHRA): designed for businesses with fewer than 50 full-time employees, allowing small employers to provide health benefits without offering a group health plan. In 2017, small employers providing a QSEHRA contributed an average of $280.20 per employee for self-only coverage or $476.56 per employee with family coverage.
• Group coverage HRA: used alongside a traditional group health plan to help employees cover out-of-pocket expenses.

Pros of offering HRAs for employers

HR leaders always look for ways to balance employee benefits with budgetary constraints. That’s why HRAs offer several advantages:

• Tax benefits: HRA contributions are tax-deductible for your organization.
• Flexibility: You can design the HRA to meet your company’s specific needs and budget.
• Attraction and retention: Offering an HRA can help you compete for top talent, especially if you’re a small business that can’t afford traditional group health insurance.

Cons of offering HRAs for employers

While HRAs offer many benefits, they’re not without challenges. Here are some things to keep in mind:

• Administrative burden: Managing reimbursements and staying on top of compliance can be time-consuming. Consider whether you have the resources to handle this in-house or if you need to outsource.
• Employee education: HRAs can be confusing for employees who are used to traditional insurance. You’ll need to develop an effective communication strategy to help them understand and appreciate this benefit.
• Compliance: HRAs are subject to various regulations, including the Employee Retirement Income Security Act (ERISA), the Health Insurance Portability and Accountability Act (HIPAA), and the Affordable Care Act (ACA). Staying compliant requires ongoing attention and expertise.

How to implement an HRA

Here’s what you should do once you’re ready to set up an HRA:

1. Choose a type of HRA: Carefully consider your organization's goals and how each type of HRA aligns with them. Evaluate ICHRAs, QSEHRAs, and group coverage HRAs based on your company's size, your budget, and your employees' needs. Your broker can (and should) help with this step.
2. Determine the eligibility criteria: Are all employees eligible for your HRA, or just certain classes? Consider factors like full-time vs. part-time status, job classifications, and any legal requirements.
3. Set contribution amounts: Determine how much you'll contribute to each employee's HRA. Consider offering different amounts based on factors like the employee's age or family size, ensuring compliance with non-discrimination rules.
4. Establish reimbursement requirements: Define which expenses will be eligible for reimbursement. While the IRS provides guidelines, you can be more restrictive if desired. Clearly communicate these guidelines to your employees.
5. Communicate: Create a comprehensive plan to educate your employees about the HRA. This might include informational sessions, printed materials, and an online resource center.
6. Choose an administration method: Decide whether you should handle claims in-house or work with a third-party administrator (TPA). Consider factors like cost, expertise, and your HR team's capacity.
7. Plan for ongoing management: Set up regular reviews of your HRA to ensure it continues to meet your company's and employees' needs. Stay informed about regulatory changes that might affect your HRA.
8. Test the system: Before full implementation, conduct a trial run with a small group of employees to identify and address any potential issues.
9. Prepare for tax implications: Consult with a tax professional to understand the tax consequences for both the company and the employees.