Health Reimbursement Arrangement

How an HRA works

The employer promises an amount, say $1,500 a year for single coverage, and writes the rules: which expenses qualify, whether unused money carries over, and who is eligible. There is no actual bank account in most cases. When an employee submits a receipt or uses an HRA debit card, the employer (through a third-party administrator) reimburses the expense from its general assets. Reimbursements are excluded from the employee's income, and the employer deducts the cost.

Three features set an HRA apart. Employees cannot contribute. The employer pays only for claims actually reimbursed, not the full promised amount. And the money generally stays with the employer when someone leaves, unless the plan says otherwise. HRAs are group health plans, so they carry ERISA duties, COBRA rights and, for self-insured designs, Section 105(h) nondiscrimination rules that stop them favoring highly compensated employees.

Types of HRA

• Integrated HRA (group coverage HRA). Paired with the employer's group medical plan, often a high-deductible health plan, to cover part of the deductible. ACA rules mean a stand-alone HRA for active employees generally must be integrated with group coverage, except for the designs below.
• Individual coverage HRA (ICHRA). Available since 2020 to employers of any size. Employees buy individual market coverage or Medicare, and the HRA reimburses premiums and, if the employer chooses, other medical costs. Allowances can vary by class of employee, such as full-time vs part-time, hourly vs salaried, or work location, and within a class by age and family size. An employer cannot offer both a group plan and an ICHRA to the same class.
• QSEHRA (qualified small employer HRA). For employers with fewer than 50 full-time equivalent employees that offer no group health plan. Annual reimbursement is capped at limits the IRS adjusts each year, and the arrangement must generally be offered on the same terms to all full-time employees.
• Excepted benefit HRA (EBHRA). Offered alongside a group plan to reimburse limited items such as dental, vision or short-term coverage premiums, up to a small annual cap.
• Retiree HRA. Covers former employees only, which exempts it from many ACA rules.

ICHRA and QSEHRA both require a written notice to eligible employees, typically 90 days before the plan year starts.

HRA vs HSA vs FSA

• Who funds it: HRA employer only; HSA employee and employer; flexible spending account mostly employee, sometimes with an employer match.
• Who owns it: HRA and FSA belong to the employer's plan; an HSA belongs to the employee and moves with them.
• Plan requirement: HSA requires an HDHP; HRA types have their own pairing rules; FSA has none.
• Rollover: HRA at the employer's choice; HSA always; FSA only a limited carryover or grace period.

Combining an HRA with an HSA takes care. An HRA that pays general medical expenses before the deductible makes the employee ineligible to contribute to an HSA. Use a limited-purpose (dental and vision) or post-deductible HRA design if employees also have HSAs.

ICHRA and the employer mandate

For applicable large employers, an ICHRA can satisfy the ACA employer mandate if it is offered to full-time employees and is affordable, measured by comparing the employee's cost for the lowest-cost silver plan in their area, after the allowance, with the IRS affordability percentage. An affordable ICHRA also means the employee cannot get a premium tax credit on the Marketplace, so a poorly sized allowance can leave lower-paid staff worse off than having no offer at all.

ICHRA appeals to employers with workforces spread across many states, such as remote contact center agents, because each person buys a local plan. The trade-offs are real: individual market networks are often narrow, premiums vary sharply by age and location, and employees need help shopping. Budget for enrollment support and model allowances by rating area before committing.

Mistakes employers make with HRAs

• Reimbursing individual premiums through a plain HRA that does not meet ICHRA or QSEHRA rules, which can trigger ACA excise penalties.
• Missing the 90-day notice for ICHRA or QSEHRA.
• Forgetting that HRAs are subject to COBRA.
• Pairing a first-dollar HRA with an HSA program.

HRA rules are technical and change with guidance, so confirm your design with a benefits attorney or administrator. See employee benefits for where HRAs fit in a broader package.