Small employers with no group health plan can provide a QSE-HRA to reimburse employees who obtain their own health insurance.

Introduction

The Health Reimbursement Arrangement (HRA) is a medical expense reimbursement plan funded by an employer for its employees. Reimbursements through an HRA are tax-deductible for the company and tax-exempt for employees.

HRAs have been popular with employers for decades. All of the costs were tax-deductible for employers and all of the rules and plan options were decided by employers.

And, there was no interference from the government until 2002, when the IRS issued formal guidance in Notice 2002-45.

The Notice defined the HRA, in part, as an employer-provided arrangement which:

• Is paid for solely by the employer
 
• Is excluded from the employee’s gross income (tax-exempt),
 
• Reimburses the employee and dependents for medical care expenses,
 
• May only provide benefits that reimburse expenses for medical care as defined in § 213(d),
 
• Requires substantiation of each medical care expense submitted for reimbursement,
 
• Provides reimbursements up to a maximum dollar amount for a coverage period,
 
• Allows that unused balances at the end of the year may be carried into the following year,
 
• Is subject to HIPAA privacy and COBRA continuation rules,
 
• Must be established with a written plan document and a copy of the plan document’s Summary Plan Description given to every eligible participant.

New ACA rules

When the Affordable Care Act arrived, HRAs took a hit. Popular plans that employers had long used to reimburse employees who bought their own health insurance were disallowed by the new law, and HRAs with a group health plan could only offer plans that carry all the new ACA-required essential health benefits with accompanying higher premiums.

A lot of employers lost their ability to provide an HRA to their employees on the same terms as before, while others could no longer afford the new group health plans the ACA required. It was a hardship for many employers and employees alike.

ACA relief for small employers

Eventually, small employers found relief from the ACA through the Qualified Small Employer HRA. Legislated through the 21st Century Cures Act of 2016, this ‘new’ HRA returns the ability for employers with fewer than 50 employees (and therefore not under the mandate) to once again provide a stand-alone HRA to reimburse employees buying their own health insurance.

More HRA options for 2024

In October 2017, President Donald J. Trump issued Executive Order No. 13813, Presidential Executive Order Promoting Healthcare Choice and Competition Across the United States. In part, it instructs the Departments of Treasury and Health and Human Services, “to increase the usability of HRAs, to expand employers’ ability to offer HRAs to their employees, and to allow HRAs to be used in

Less than two years later, in June, 2019, the President unveiled two new HRAs to do just that.

Available for plan years beginning on January 1, 2020, or later, the Individual Coverage HRA allows employers of any size to offer an HRA to reimburse individual health insurance premiums to employees and the Excepted Benefit HRA is designed to accompany a group health plan but may be elected by employees whether or not they participate an employer’s group health insurance.

HRA vs. FSA

The main difference between the HRA and Health FSA is that the HRA is funded solely by the employer while the FSA can be funded by both the employee and the employer.

Who funds the account determines how funds accrue and what happens with unused funds at the end of a plan year.

The FSA must be pre-funded. This means that when an employee elects to contribute $3,000 (through bi-weekly pre-tax salary deductions of $100 throughout the year), the employer must make the entire $3,050 available on day 1. This puts the employer at some risk of loss, though it is usually minimal.

With an HRA, the employer has the option to fund the account on a month-to-month basis. The employer also decides what happens with unused HRA balances at the end of the year and can allow employees to roll remaining funds over to the next plan year.

In contrast, an FSA, has a use-it-or-lose-it rule for balances that exceed the employer’s optional rollover allowance (up to $640) or 75-day grace period.

Popular HRA plan designs

Basically, there are two types of Health Reimbursements. Integrated HRAs require a group health plan while stand-alone HRAs not only do not require one, but usually forbid it.

Integrated HRAs

Deductible Gap

The Deductible Gap HRA Plan works with a larger high-deductible health insurance plan (HDHP). Example: The employer chooses a $5,000 deductible to reduce premium substantially. The employee only pays their regular $1,000 deductible and the Deductible Gap HRA pays the remaing $4,000 of deductible expenses. Once the deductible is met, the HRA no longer reimburses that employee for expenses for the year.

The employer saves by reducing its annual group health premium while the HRA cushions a large jump in deductible for employees. On average, about 20% of employees will have an expense that qualifies for deductible gap reimbursement.

This short video (1:09) shows how it works: How to Save on Group Health Premiums

Comprehensive HRA Plan

The Comprehensive HRA Plan is combined with a traditional employer-sponsored group health plan (including employees participating in a spouse’s or parent’s group health plan). It reimburses most 213(d) medically-necessary out-of-pocket expenses, including excepted benefit insurance premium expenses.

Video: Lower Group Health Premium with an HRA

Excepted Benefit (EBHRA)

The EBHRA is a new plan design that allows employers to reimburse employees for premiums and related medical expenses covering dental and vision care and other excepted benefits.

Stand-alone HRAs

Individual Coverage HRA

With an ICHRA, employers reimburse employees for individual health insurance premiums for individual coverage purchased on the open market or an exchange.

The employer decides the amount of expenses the HRA will reimburse for the plan year as well as whether it will reimburse premiums only or also reimburse other eligible medical expenses.

Employees must provide proof of eligible coverage. Medicare is eligible but no group health plan or STLDI (short-term) coverage can be integrated with an ICHRA.

Learn more: Individual Coverage HRA: Choice and affordability in employee health benefits

Video: The ICHRA video: Freedom from one-size-fits-all group health plans

Qualified Small Employer

A QSEHRA makes it simpler and more affordable for small employers to offer a more competitive employee benefits package.

For groups of fewer than 50 employees, a QSEHRA reimburses individual health coverage premiums that meet the minimum essential coverage (MEC) standard and qualified medical expenses.

Employers are limited to providing up to the annual limit of $5,150 for individual and $10,450 for family coverage (2019). Also, the employer must not have any group health plan for active employees.

Reimbursement rules require substantiation of expenses plus proof of MEC, which can be the employee’s purchased plan or evidence of coverage through a spouse’s or parent’s MEC plan.

This HRA coordinates with the ACA’s premium tax credit for individual or family health coverage purchased on the exchanges.

Learn more: Qualified Small Employer HRA Plan Document Package just $199

Video: A Better Group Health Insurance Alternative – QSEHRA

One-employee (or spouse)

Employers with one employee (for example, the spouse in a family business or the pastor for a church) can provide tax-saving health benefits for coverage that is not subject to the ACA’s essential health benefits or MEC rules.

A Section 105 HRA for one-employee groups reimburses the employee for health insurance premiums purchased on the open market or exchanges as well as eligible medical expenses not covered by insurance, including co-pays and deductibles.

Learn more: One-employee HRA Plan Document Package just $199

Video: How to save $1,000s with a 1-Person HRA