The Complete Guide to Health Reimbursement Accounts for Small Business
Everything you need to know about HRAs for small business employers
By Leslie Jablonski – Updated Feb 18, 2023
Reviewed by Whitney Kline – Fact checked by Lou Spatafore
Thinking about getting health insurance for your small business?
Health reimbursement accounts (HRAs) are a flexible, valuable alternative to health insurance. With no minimum contribution and completely customizable structure, HRAs are quickly becoming one of the best benefit vehicles around.
HRAs for small businesses (QSEHRAs) are designed to compensate your employees for the cost of individually purchased health insurance. Unlike traditional group insurance, HRAs give employees the opportunity to choose the health plan that is right for them.
In this guide, we’re going to dive into the world of small business HRAs.
First, we will answer some of the most frequently asked questions about HRAs for employees.
After that we’ll look at the different types of HRA that are available to small employers, as well as some other low-cost healthcare alternatives for small businesses.
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KEY TAKEAWAYS: Health Reimbursement Accounts
These are the main points and key takeaways that this guide covers:
Health Reimbursement Accounts let employees choose the health plan that’s right for them.
Traditional small group health insurance forces diverse groups of people into the same plan. HRAs let employees choose whatever plan they like the most, and then receive a tax-free reimbursement for their premiums. HRAs can also be used to reimburse other out-of-pocket expenses.
Health Reimbursement Accounts are company owned, operated, and defined.
As a small business employer, you have all the authority to choose how the HRA works. That means that you get to decide:
- The amount you want to contribute per-employee
- The types of expenses that are approved
- Other terms and conditions of the HRA
Small businesses have a lot of options when it comes to health benefits.
Health reimbursement arrangements are not the only health benefit available to small businesses. Even businesses with 2 or 3 people can get access to significant group coverage tax breaks. Health sharing plans are also available at a fraction of the cost of insurance.
Health Reimbursement Accounts are tax-deductible.
Just like group insurance premiums, any funds that the employer pays towards an employee HRA are tax deductible.
START HERE: THE MOST FREQUENTLY ASKED QUESTIONS ABOUT HEALTH REIMBURSEMENT ACCOUNTS (F.A.Q.)
Q: What are HRAs?
Health reimbursement accounts (or health reimbursement arrangements) are flexible benefit plans that allow employers to compensate their workers for the cost of health insurance.
HRAs are commonly used to reimburse employees for the cost of their own individually purchased health insurance. However, HRAs can also be used in addition to a group plan to cover out-of-pocket expenses or supplemental coverage.
Q: What’s the difference between QSEHRAs and ICHRAs?
QSEHRAs (Qualified Small Employer HRA) and ICHRAs (Individual Coverage HRA) are both known as stand-alone HRAs.
QSEHRAs are exclusively for small businesses with 50 or fewer employees who do not offer a group insurance plan. They can be very simplistic in how they work, compensating employees via payroll for the cost of their individual premiums.
ICHRAs take the stand-alone model of QSEHRAs and offer it to larger companies. ICHRAs are available to companies of any size. They also give large employers more options over setting benefit levels for different employee groups.
Q: Do employees have to be enrolled in health insurance to participate in an HRA?
Q: Who contributes to a small business HRA?
Q: What are the contribution limits for HRAs?
Q: Who does the money in the HRA account belong to?
Q: Do HRAs for employees earn interest?
Q: What are eligible expenses for small business HRAs?
Q: What are the benefits of offering an HRA to employees?
One of the biggest benefits to HRAs is that they take pressure off the employer. Instead of wasting time with complicated health benefits designs, owners and managers can spend their time focusing on business operations, customer relations, etc. Meanwhile, employees are able to use their HRA benefit to choose a marketplace plan of their choice, instead of being forced into a plan that isn’t a good fit.
Q: Do employee HRAs satisfy the employer health insurance mandate?
Businesses with at least 50 full-time employees are required to offer health insurance to their employees. However, if the right conditions are met, an HRA can satisfy this mandate in the place of a group plan.
In order to satisfy the mandate, the HRA must be considered “affordable” by the IRS. This simply means that there is a minimum employer contribution that must be made.
Q: How do HRAs work?
HRAs are designed to reimburse employees for their medical expenses, which usually includes the cost of a monthly premium for a marketplace health insurance plan. As long as the employee is enrolled in a qualified health plan and the employer is meeting the right conditions, they will receive an annual compensation. The level of this compensation is set by the employer.
Q: My company has more than 50 people; Can I still offer an HRA?
Yes, employers of all sizes can offer individual coverage HRAs to their employees, as long as they are meeting all the requirements.
Q: Which employees are eligible for HRAs?
Employers are required to offer the same HRA terms to all individuals within a certain “class” of employee. In this case, class distinctions can be based on the following:
- Full time vs. Part time
- Geographic region or insurance area
- Seasonal employees
- Groups of employees who are covered by a selective bargaining agreement
- Salaried workers vs. hourly workers
- Temporary employees provided by staffing firms
For example, employers could choose to provide some employee classes with a traditional group health plan, and others with an individual HRA.
Q: What are the requirements for offering HRAs? [Attestations / Substantiation Requirements]
There are two primary requirements that employers must comply with in order to offer an individual HRA to their employees.
- Annual Coverage Substantiation Requirement. This states that all HRA participants must be enrolled in individual health insurance coverage (or will be by the time that the HRA benefit is paid). Original Medicare and Medicare Advantage Plans count towards this requirement as well.
- Ongoing Substantiation Requirement. This states that HRA benefits cannot be used to reimburse a medical expense unless the participants are still enrolled in health insurance or Medicare.
Employers, or sometimes employees themselves, must periodically submit proof that these requirements are being met. This proof is often the direct payment of a health insurance premium, and is usually called a participant attestation.
Fortunately, HRA attestations are usually handled by the HRA administrator, and do not add any complications to offering an HRA.
The IRS has created a set of model attestations that businesses and HRA administrators can use; Click here to download [PDF].
Q: What is an “affordable HRA” according to the IRS?
An employee individual HRA is considered affordable if, after the HRA reimbursement, the employee is paying less than 9.61% of 1/12 of the employees annual household income.
If your HRA is considered affordable, then the employee will not be eligible for a premium healthcare tax credit. If you HRA is not considered affordable, then the employee can opt out of the HRA and choose to claim the premium tax credit instead.
THE BENEFITS OF OFFERING A HEALTH REIMBURSEMENT ARRANGEMENT TO YOUR EMPLOYEES
Health reimbursement arrangements are perhaps the most flexible benefit option available to small and extra-small employers. Here’s why:
Employer-funded HRA contributions are tax deductible.
Just like employer health insurance contributions, anything paid towards an employee HRA is tax deductible. In addition, reimbursement payments to the employee are also tax-free in most cases.
HRAs let employees choose their own healthcare.
Traditional group health insurance forces all of your employees into the same plan. HRAs make it possible to compensate employees for the plan of their choice. Not only is this easier for the employer, but it can be an attractive benefit option to current employees and job-seeking talent.
HRAs allow for more precise budget control.
After you set your reimbursement limit, that’s it. You’re done. You can now use that number for precise forecasting and budget control. This isn’t the case with major group plans with rates that change every year.
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The employer designs the HRA
The biggest advantage of HRAs over health insurance for small businesses is their flexibility. HRA benefits are employer-designed, meaning they can be crafted to any budget or style.
The first step in the process is choosing an HRA reimbursement limit for your employees. You can set different limits based on marital status and dependents. As an example, you could choose a $300 reimbursement for single employees, $600 for married employees, and $1,000 for families.
In addition to choosing the reimbursement limit, the employer can set limits on what kind of expenses are qualified for reimbursement. Many employers limit the HRAs to pay for premiums only, while others include copays, prescriptions, dental, and emergency services.
The employees pay for their own healthcare expenses
Because HRAs are not health insurance, all incurred medical costs are paid by the employee. Only after the expense has been approved will it be reimbursed by the employer. The exception to this is monthly premiums, which HRAs can pay automatically after individual coverage is verified.
As the architect of your small business HRA, you can choose to limit which expenses are qualified. If you do not set limitations, then all of the items listed in IRS Publication 502 are considered eligible.
Employees provide proof of payment
With HRAs, employees pay for their health care costs on their own. After the costs are incurred, the employee provides proof of payment to the HRA administrator. As long as the costs are covered under the HRA plan and don’t exceed the limit, the costs will be reimbursed by the employer.
Many companies choose to give their team a flat-rate reimbursement for employee health insurance premiums. Once the employer has proof of the employee’s individual plan, these reimbursements can be made automatically via payroll.
In order to stay compliant with HIPAA privacy rules, you’ll want to have an HRA administrator handle your reimbursements. There are several companies that handle HRA administration at very low costs.
CAN MY EMPLOYEES STILL QUALIFY FOR SUBSIDIES (ADVANCED PREMIUM TAX) ON THE HEALTH INSURANCE MARKETPLACE?
Your employee cannot receive premium subsidies if he or she is participating in an HRA.
If your reimbursement is not high enough, the HRA will be considered “not affordable”. In that case, your employee can choose to opt out of the HRA and instead choose an insurance plan with a premium tax credit. You can determine whether or not your plan is considered affordable using this Healthcare.Gov ICHRA Worksheet [PDF].
THE DIFFERENT TYPES OF HEALTH REIMBURSEMENT ARRANGEMENT PLANS
There are four basic types of HRAs available to business. Companies with 50 or fewer employees should pay close to the QSEHRA or the ICHRA, both popular options.
Integrated HRAs are designed to work with a group major medical plan. This is a way to compensate their workers for out-of-pocket medical costs that aren’t covered by the group plan.
Qualified Small Employer HRA (QSEHRA)
Sometimes referred to as a stand-alone HRA, QSEHRAs are only available to businesses with 50 or fewer employees. QSEHRAs make it possible for employers to offer a tax-advantaged reimbursement benefit for employees who have individual insurance plans.
Dental / Vision / Retiree HRA
Some HRAs are dedicated to a specific medical purpose, such as dental or vision. These HRAs are a popular supplement to group insurance for employers looking to offer additional tax-advantaged benefits.
Individual Coverage HRA (ICHRA)
Like the QSEHRA, the ICHRA is a reimbursement benefit that is designed to cover individual insurance premiums. The difference is that ICHRAs are available to employers of all sizes. Because of this, the rules and restrictions of ICHRAs can be more complicated.
ESSENTIAL HRA RULES FOR SMALL EMPLOYERS: HIPAA COMPLIANCE
Employers who choose to offer a health reimbursement account must comply with the Health Insurance Portability and Accountability Act of 1996 (HIPAA). This is a set of rules that were designed to protect patient health information (PHI).
Fortunately, your HRA administrator will ensure that your benefit plan is following all the rules. HRA administrators process all requests for reimbursement, so the business is never directly involved with employee medical expenses or patient health information.
ALTERNATIVE OPTIONS FOR SMALL BUSINESS HEALTH BENEFITS
But no two businesses are the same. If a small business health reimbursement arrangement isn’t right for your company, there are other options to consider:
Employee health sharing programs
Small businesses medical cost sharing plans are offered by groups that usually require a statement of faith or a statement of principles in order to join. These plans also come with waiting periods for pre-existing conditions, and less comprehensive coverage in general. While they can be a great way to save money, not everyone is suited for health sharing.
Your personal advisor can tell you more about employee health sharing plans.
Employee health savings accounts (HSA)
In addition, any amount the employee contributes is pre-tax. That means that this amount is not subject to payroll tax, FICA, or unemployment taxes.
You don’t have to offer a group insurance plan in order to contribute to an employee HSA. However, the employee must be enrolled in an HSA-qualified high-deductible plan. Some health sharing plans are also HSA-qualified.
SUMMARY: WHAT YOU NEED TO KNOW ABOUT HRAs, QSEHRAs, AND ICHRAs FOR YOUR SMALL BUSINESS
For small businesses, health reimbursement accounts are an easy way to start offering health benefits without having to dive head-first into the waters of group plan administration. HRAs are simple, flexible, and valuable … three things that form the cornerstone to any successful benefits plan.
If you are a small business owner thinking about getting health benefits for your employees, HRAs are a great place to start. Your personal advisor can be your point person when it comes to setting up a plan. Call us at 800-913-0172 to make an appointment, or click here to compare rates on individual health insurance.
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