Recent rule changes to Health Reimbursement Arrangements (HRAs) may provide an opportunity for small business owners to help their employees buy health insurance.
HRAs, sometimes called Health Reimbursement Accounts, are employer-funded group health plans. And under new rules implemented on January 1, 2020, employers can now offer their employees a new type of HRA called an “individual coverage HRA” in lieu of group health insurance, as reported by Investopedia. Staff can use these HRAs to purchase their own comprehensive individual health insurance with pretax dollars either on or off the Affordable Care Act’s health insurance marketplace. Individual coverage HRAs can also reimburse staff for qualified health expenses such as co-payments and deductibles.
The new rule would also allow employers to provide traditional group health insurance that offers “excepted benefit HRAs” to reimburse employees for up to $1,800 a year in qualified medical expenses, the article noted. Employees can enroll in an excepted benefit HRA even if they decline group health insurance coverage, but they cannot use the funds to buy comprehensive health insurance. They can, however, use the funds to pay for short-term health insurance, dental and vision insurance premiums, and qualified medical expenses.
Types of HRAs
For 2020, there are six different HRAs: (1) qualified small employer HRA or QSEHRA, (2) individual coverage HRA or ICHRA, (3) group coverage HRA, (4) excepted benefit HRA, (5) retiree HRA, and (6) limited purpose: dental/vision HRA.
Qualified Small Employer HRA (QSEHRA)
The qualified small employer HRA (QSEHRA) is available to companies that have fewer than 50 full-time-equivalent employees and do not offer group health, dental, or vision insurance. All full-time employees are automatically eligible. Companies have the option of including part-time workers in the arrangement. However, part-time workers must be offered the same monthly amount as full-time workers. To use their designated QSEHRA amount, employees must have a minimum essential coverage health insurance plan (a plan that meets the Affordable Care Act’s requirements).
For 2020, the maximum monthly amount employers can offer is $437.50 ($5,250 yearly) per employee-only and $883.83 ($10,600 yearly) per employee plus family. These amounts can roll over year to year so long as the total reimbursements for the year do not exceed the maximum allowed by law.
Individual Coverage HRA (ICHRA)
The individual coverage HRA (ICHRA) is available to all companies regardless of size as long as the business has one employee who is not a self-employed owner or the spouse of a self-employed owner. Companies can offer different monthly amounts to employees based on employee classes; these different classes include full-time, part-time, seasonal, employee work locations, and employees who have not satisfied a waiting period. The ICHRA has no annual cap on the amount employers can offer. Unused amounts can roll over year to year.
Companies cannot offer the ICHRA if they also offer the QSEHRA or excepted benefit HRA. While companies can simultaneously offer a group health insurance policy, they cannot offer both the group policy and the ICHRA to the same employee class. To use their designated ICHRA amount, employees must have individual health insurance coverage, not group coverage.
Group Coverage HRA
The group coverage HRA, or integrated HRA, is available to all companies regardless of size that offer a group health insurance policy. The group health insurance policy is typically a high-deductible plan. Designed to lower out-of-pocket deductible costs for employees, the group coverage HRA is only available to employees who are covered by the company’s group health insurance policy. The group coverage HRA has no annual cap on the amount employers can offer. Companies can offer different amounts to different employees based on job-specific criteria. Unused amounts can roll over year to year.
Excepted Benefit HRA
The excepted benefit HRA is available to all companies regardless of size that offer a group health insurance policy. Unlike the group coverage HRA, the excepted benefit HRA is available to all employees that are offered group insurance, not just those who enroll in the insurance. The excepted benefit HRA must be made available on the same terms to all “similarly situated individuals,” regardless of health condition. Companies cannot offer both an excepted benefit HRA and an individual coverage HRA (ICHRA).
The excepted benefit HRA can be used to reimburse employees for medical expenses, COBRA premiums, and premiums under an excepted benefit such as short-term limited duration insurance, vision insurance, and dental insurance. For 2020, the maximum monthly amount employers can offer is $150 ($1,800 yearly). Unused amounts can roll over year to year.
For more information, see this Q&A for employers and employees.
The retiree HRA is available to all companies regardless of size. However, as its name suggests, the retiree HRA is only available to a company’s retired employees. There are no group health insurance requirements and no caps on the amount employers can offer.
Limited Purpose: Dental/Vision HRA
The limited purpose: dental/vision HRA is available to all companies regardless of size. Companies can offer this HRA in addition to an existing health insurance policy to reimburse employees for dental and vision expenses only.
How an HRA Works
All HRAs function in the following way:
- Employers determine the tax-free reimbursement amount for employees each month, but all staff in the same class must receive the same contribution. Workers who are older or who have dependents may receive more.
- Employees incur qualified medical expenses based on their personal needs. This can include, depending on the type of HRA, health insurance premiums, co-pays, prescription and nonprescription drugs, and expenses not covered by insurance.
- Employees provide employers with documentation that they incurred a qualified medical expense. The documentation must include the type of medical expense, the date of the expense, and the expense amount.
- Employers evaluate the documentation for the three necessary components, determine the expense is a qualified medical expense, and then approve the expense. (Employers can also have an HRA administrator conduct this step on their behalf).
- Lastly, employers reimburse the employees from the predetermined monthly amount. Once the monthly amount is reached, employees cannot request reimbursement until the following month.
To see if any of these options is right for your business, consider talking to a licensed tax professional, benefits specialist, or health insurance agent or broker.