What is an HRA?
Health Reimbursement Arrangements (HRA) are a type of employer-funded health benefit that allows employers to reimburse employees for qualifying medical expenses and premiums tax-free. When designing the HRA, employers choose the amount of the annual benefit. There is no account to prefund, and the employer only reimburses for claims employees submit. Plans can be designed to reimburse premiums, medical expenses, or both.
Why HRAs Are Better than Group Plans
Administratively, HRAs are easier to adopt than group health plans for many reasons. They allow employers to spend more time doing what they do best—serving their customers—and less time researching and administering the perfect plan options for their teams.
- No Participation Rate Requirements: For employers who constantly worry about maintaining group participation rates, HRAs are the way to go. The only requirement with HRAs is that they are made available on the same terms to all similarly situated employees. That means that if you want to provide the HRA to full-time employees and not part-time, that is perfectly fine.
- Controlled Costs: Let’s be honest: group health plans are expensive to maintain, and premiums tend to creep up year over year. Employers with group plans are effectively in charge of managing their employee spend, whether they are self-funded or fully insured. If an employee has an expensive surgery during the year, the employer is on the hook for their spend (either in the form of covering the actual cost of care for self-funded plans or rate increases the following year due to utilization).
- No Surprises: At renewal time, employers hold their breath waiting to see what the group plan increase will be for the next year. The options are to accept the new plan rates or shop around to find a better deal (which usually means a few employees will lose their favorite doctor in network). With HRAs, employers do not have to be concerned with being priced out of the benefit as the annual allowance is managed at the employer’s discretion. Employers can increase allowances at the beginning of the plan year when the budget allows, or chose to maintain the benefit at a constant level. This is great news for new businesses that are nervous about offering a benefit they might not be able to afford later down the road.
Two New HRAs
There are many types of HRAs available, but we recommend focusing on two particular “flavors” of HRAs that are tracking to completely change the way businesses offer benefits to their teams: the ICHRA and QSEHRA (pronounced “ICK-rah” and “kyoo-SEH-rah” for short).
ICHRA: Individual Coverage HRA
ICHRA is the new kid on the block in terms of HRAs. Regulations were announced in June 2019 and it’s been available for employers since the beginning of 2020. With ICHRA, employees must purchase a qualifying individual health insurance policy or Medicare (Parts A and B, or Part C) in order to participate in the benefit. Once employees qualify, they can submit claims for reimbursement.
The individual coverage HRA can be offered with a group plan as long as the benefits are not offered to the same class of employees (i.e., employees cannot choose between the two) so it is a good option for employers that are not quite ready to cut out group plans entirely.
Other things to know about ICHRA:
- Available to employers of any size
- No maximum contribution rates. Rates are set for a class of employees and can increase based on family size or age within a class.
- Employers have 11+ customizable class options to group employees and set allowances. The classes are
- Employees in a Collective Bargaining Unit
- Employees in a Waiting Period
- Employees in a specific geographic location
- Foreign employees working abroad (no US income)
- Temporary employees of a staffing firm
- Combination of 2 or more classes above to create a custom class
- In addition to the classes above, ICHRA has a “new hire provision.” This provision allows employers to phase in ICHRA by offering it to new employees hired after a specified date, and to grandfather existing employees to the group plan.
- Employees have the option of opting out for the year and accepting Premium Tax Credits in certain circumstances.
QSEHRA: Qualified Small Employer HRA
QSEHRA is the predecessor to ICHRA. Launched in 2017, this HRA was designed specifically for small employers. Still relatively new in terms of HRAs, employers are still discovering this vital option. In order for employees to participate, they must be enrolled in a health plan that meets Minimum Essential Coverage (MEC) such as marketplace plans, Medicare (Part A or C), Medicaid, Tricare, spouse group plans, etc.
Other things to know about QSEHRA:
- Limited to employers with fewer than 50 full-time employees
- Annual maximum contribution limits have increased slightly for 2020:
- For an individual: $5,250/year or $437.50/month.
- For a family: $10,600/year or $883.33/month.
- Limits haven’t been announced for 2021.
- Employers must offer to all full-time employees but can exclude part-time, seasonal, and under 25 years
- Employer cannot offer a group plan of any kind (health, vision, dental, etc.)
- Employees cannot opt out of QSEHRA
- Any premium tax credits employees are eligible for will be reduced dollar-for-dollar by their QSEHRA allowance
If you’re interested in learning more about ICHRA or QSEHRA, we recommend that you contact the experts at Take Command Health. They’ve put together two detailed guides that can help you determine if ICHRA or QSEHRA will benefit you and your employees. You can also watch their on-demand webinar on ICHRA here, or take a look at the TCH one-pagers explaining the benefits of using ICHRA as well as a side-by-side comparison between ICHRA and QSEHRA.
This post updated November 19, 2020; originally published September 18, 2019.