HRA Insurance Plan

What is a HRA Insurance Plan

A Health Reimbursement Arrangement (HRA) is an employer-sponsored type of health-based account for reimbursing employees with tax-free funds used for qualified healthcare expenses. Its salient features include;

• IRS-approved
• Reimbursements are tax-free (including health insurance premiums, out-of-pocket medical expenses, or both).

Most employers prefer to offer HRAs like the ‘’Qualified Small Employer HRA (QSEHRA)’’ or the “Individual Coverage HRA” as an alternative to Traditional Group Health Plan Coverage, subject to certain conditions.

However, some types of HRAs can also be packaged to supplement Group Health Plan coverage in lieu of an HSA, or offered as an alternative benefit for a select group of workers who don’t qualify for Group Health Insurance Plan.

How do HRA Insurance Plans work

Designing employee benefits

Employers will design and adopt a formal plan and a summary plan description (SPD) that suits the needs of their employees. This includes;

• Tax-free funds available for employees
• Expenses that are considered eligible for reimbursement
• Whether there will be different benefits to different groups.

Once the benefits are set up, the plan is ready for use.

Healthcare purchases

Employees under QSEHRA or ICHRA will make purchases for the qualifying medical expenses and healthcare services using their own funds while those offered integrated HRA—can use their allowances to help cover expenses up to their deductible.

Please remember, that this allowance can only be used to cater to out-of-pocket expenses, not insurance premiums.

Submission of paperwork for reimbursement

After purchases are made in the step above, employees need to submit documentation showing that they indeed incurred medical expenses

Invoices and receipts submitted for reimbursement must include:

• The name of the item or service
• Costs associated with the item or service
• The name of the vendor
• The date of purchase

Review and reimburse expenses

Finally, the paperwork submitted will be reviewed to determine if it’s a qualified expense and can either be approved or rejected by the employer.

Typically, employees are usually reimbursed through payroll as a non-taxable line item in the paychecks, although you can also be paid as a separate check, cash, or a bank transfer.

Types of HRA

HRA plans and setups will vary in response to a firm’s size, budget, and current Group Health Plan status. Generally, five distinct types of HRAs are available:

Standard HRA

Salient features;

• Employer on the limits to contribute to the account. (No federal limit).
• It’s a must for the Standard Plan to be offered to all employees and on the same terms.
• Employers own the HRA plan and are totally in control of medical expenses to reimburse.
• Covers deductibles, coinsurance, copays, prescriptions, and dental and vision expenses.
• Not allowed to cover health insurance premiums.

Qualified Small Employer HRA (QSEHRA)

Allows small employers to provide additional plan choices to their employees without having the need for wider group health plan coverage. QSEHRA reimburses employees for insurance premiums, out-of-pocket costs, or both.

To sponsor a QSEHRA, the employers must meet the requirements below:

• Have 50 or fewer full-time or equivalent employees (FTEs). They may exclude seasonal and part-time employees and those under age 25.
• Doesn’t have a group coverage plan
• QSEHRA applies all FTEs on the same terms

Please take note;

• Employees do cater for out-of-pocket and then get reimbursed by the plan
• The employer has full discretion on rolling over the end-year balances
• QSEHRA can be set up at any time, not limited to enrollment periods only.

Individual Coverage HRA (ICHRA)

Individual coverage HRA (ICHRA) works for small as well as big employers.

• Employees do pay for Individual Health Insurance Premiums, not Group coverage provided by the employer
• Can be offered as a standalone benefit or as an alternative to those workers not qualifying for the current group health insurance plan
• Employers allowed to exclude certain groups of employees from participation
• No federal limits on contributions.
• The plan reimburses Qualifying individual health insurance premiums, out-of-pocket costs, or both.

Integrated HRA

Integrated HRA works as a supplement to the Affordable Care Act (ACA)-compliant employer-sponsored group health insurance plan. It’s designed to help employees cover out-of-pocket healthcare costs, meaning employees must be enrolled in the group health insurance to enroll in the HRA.

It helps cater for costs not covered by the group plan. This means it will not cover reimbursement for employer-provided group insurance premiums but rather pay for deductibles, coinsurance, copayments, and any other approved medical expenses.

• Available to all businesses that offer a group health plan.
• Workers must be enrolled in the employer’s group health plan (usually HDHP) to benefit.
• Employers customize out-of-pocket threshold amounts for single and family enrollment.
• Once an employee reaches the threshold, the health plan pays for eligible expenses until it reaches the deductible for the plan.
• Employers can vary contributions across employee classes.
• Unused funds can be rolled over to the next year.

Excepted Benefit HRA (EBHRA)

Excepted Benefit HRA (EBHRA) does provide an account-based supplement to the companies’ group health coverage without the constraints of integrated HRAs

• Offered by businesses or companies of any size,
• EBHRA covers “excepted” benefits i.e. copayments, deductibles, and premiums paid for dental and vision.
• It May cover COBRA insurance, long-term care, and short-term care.
• Offered to each employee on the same terms (Uniform availability).
• The IRS publishes yearly contribution limits for the EBHRA. Companies can only fund the account up to this limit (Limited Dollar benefits).

HRA Limits

There is no limit on employer contributions to an HRA (only QSEHRA has annual limits).

Qualified Small Employer HRA (QSEHRA) Limits

Source: IRS revenue procedure 2021-25

Other HRA Limits

Individual Coverage HRA (ICHRA) Limits

Source: IRS revenue procedure 2021-25

Excepted Benefit HRA (EBHRA) Dollar Limits

Source: IRS revenue procedure 2021-25

HRA Insurance Plans pros and cons

Pros:

Accessibility

Compared to traditional group health insurance coverage HRA is less complex, predictable in terms of costs (annual rate hikes), and less strict in requirements (no participation or minimum contribution requirements).

Employers will just focus on monthly benefit allowance and employees use their allowance on any qualified medical expense as appropriate.

 Suitability

It doesn’t lump employees into a one-size-fits-all plan. HRA gives employees choices in terms of coverage, network, or premium amount hence more individualized. Each worker makes purchases that align with personal health, budget, and current family situation.

Tax advantages

HRAs qualified reimbursements are not taxable. Individual Coverage HRAs do provide the tax advantages available for traditional group health plans (exclusion of premiums and benefits received, from federal income and payroll taxes) to HRA reimbursements of individual health insurance premiums.

Employers may also trade employees’ pay for health insurance (salary reduction arrangement under a cafeteria plan) to make up for portions of the individual health insurance premium not covered by the employee’s Individual Coverage HRA.

IRS Returns

Qualified HRA reimbursements are not taxable and hence not declared on your tax return.

However, IRS considers any distribution of unused reimbursements at year-end as income. Also, any amounts distributed when leaving employment are also considered taxable income and must be declared.

Cons

• HRS does not cover important medical services like teeth whitening, expenses related to death, and some non-prescription medication
• The employer has too much say, from the setup too much money goes into the plan
• May stress cash flows as employees must pay first and then claims for reimbursed

HRA Health Plan vs HSA

Can an HRA be used to pay insurance premiums

The answer is YES!

HRA’s can;

• Settle health insurance premiums,
• Long-term care coverage, and
• Qualified medical expenses that are not covered by another health plan (under employers’ discretion).

However, the option is only available to QSEHRA and ICHRA.

ICHRA

They reimburse premiums while providing the same tax-deferred status for employer contributions towards a traditional group health plan. It covers:

• Premiums Only
• Premiums including some Qualified Medical Expenses
• Qualified Medical Expenses Only

Employers can also ensure:

• All employees get the same amount
• Peg reimbursements on family size (employer may provide graduated amounts to cater for single employees, married employees, and employees with families or dependents.
• Vary by workers’ age i.e. offer higher reimbursement to older workers.
• Combination of any of the above options.

QSEHRA

Only allowed if employees have a Minimum Essential Coverage (MEC) health insurance plan. It covers:

• Insurance Premiums Only
• Insurance Premiums and Eligible Medical Expenses
• An employee’s spouses Premiums in the group plan

Bottom line

• HRAs reimbursements are tax-free.
• IRS treats reimbursements as business deductions.
• QSEHRA is basically an HRA for small businesses with less than 50 full-time workers.
• ICHRA allows employees to buy their own individual health insurance with pretax dollars. It allows reimbursements for health expenses including copayments and deductibles.