Using HRAs to improve health care offerings

Health care costs have been on the rise for years. Everything from prescription medication to office visits to insurance premiums seem to be going up, with no end in sight. Costly health care expenses not only impact American families and workers who need access to medical care, but also impact businesses of all sizes who offer health insurance coverage to their employees. 

Health reimbursement arrangements (HRAs) are a trending alternative that provide employers more control of their cash flow related to health care coverage, while still offering benefits to their employees that fit their needs. 

The history of HRAs 

While payment arrangements for health care have been in place since the Civil War, the first versions of today’s HRA plans started to appear between the 1960s and 1990s, when employers opted to reimburse employees for medical expenses that weren’t covered by their health benefits plan. 

Health reimbursement arrangements didn’t become regulated by the federal government until the late 1970s under ERISA (Employee Retirement Income Security Act) and again in 1996 by HIPAA (Health Insurance Portability and Accountability Act).

HRAs later became formally defined by the IRS in 2002. Newer options for HRAs for small businesses and individual health insurance coverage were added in 2016 and 2020, respectively.

Guidance from the IRS defined the criteria under which HRAs could be used, including: 

• HRAs must be funded solely by the employer
• HRAs can only provide benefits for qualified medical expenses
• HRAs can allow the carryover of unused amounts to later years
• HRAs can reimburse employees for payment of personal health insurance premiums

Different types of HRAs 

There are several different types of HRAs that employers can choose from, depending on their business model, cash flow, and employee base. HRA plans can be set up with different contribution amounts for single employees or families, along with different reimbursement thresholds, and different rollover limits. 

Integrated HRA

An integrated HRA must be used alongside a group health insurance plan. This type of health reimbursement arrangement is designed to help employees cover out-of-pocket health care costs, but can be customized in a number of ways. 

Employers can use HRAs in place of or as another option alongside health saving accounts (HSAs) and medical flexible spending accounts (FSAs). However, unlike HSAs and FSAs, employees are not eligible to contribute to their HRA. 

Individual coverage HRA

The individual coverage HRA was created in 2020 and allows employers to use HRAs in place of group health insurance. This health reimbursement arrangement lets employers set contribution limits for employees and their families, but allows employees to shop for individual health care coverage. 

An individual coverage HRA allows employers to control their costs while also giving employees the flexibility to choose the type of medical plan that works best for their needs and budget. This HRA can be designed to cover both premiums and eligible expenses, or just premiums.

Excepted benefit HRA (EBHRA)

Like the individual coverage HRA, the EBHRA was also introduced in 2020 and covers out-of-pocket medical expenses and premiums for excepted benefit coverage like dental, vision, or COBRA premiums. 

With an EBHRA, employers are limited to $1,800 per year per employee in coverage.

Qualified small employer HRA (QSEHRA)

A QSEHRA was first introduced in 2016 and lets employers provide funds to employees to be used for eligible expenses, including insurance premiums. Only employers with fewer than 50 people and those who don’t offer group health insurance are eligible to offer a QSEHRA. 

Employers also have the option to offer dental and vision coverage HRAs and retiree HRAs, which help retired employees pay for medical expenses.

Individual coverage HRA (ICHRA)

Similar to the QSEHRA, an ICHRA plan is a federal ruling that targets companies of 50 or more employees, providing slightly different rules that do not limit against group insurance or allowance requirements. The main similarity between the two options is that both of them allow companies to set tax-free allowances for their employees to use on health insurance policies and other medical expenses.

Related: 5 FAQs about the next big thing in benefits: Individual coverage HRAs

How HRAs work 

While there are many options for how employers can set up their health reimbursement arrangement offerings, all HRAs follow the same structure. 

1. The employer sets the allowance limit

Employers decide how much tax-free money they’ll offer to employees each month or year. This amount is the maximum the business will reimburse each employee for eligible expenses. Employees know upfront how much money is available for them to spend. 

2. Employees make purchases or pay for care

Employees then choose how to spend their money, which could include health insurance premiums, braces, or anything in between. What counts as qualified is defined by the employer and the type of HRA they offer. The IRS offers thousands of eligible items and services that can be covered by HRAs. Whether the funds can be used for premiums or expenses like deductibles, copays, flu shots, and prescriptions is up to the employer.

3. Employees submit proof of expenses

Employees must then submit proof of their qualified expense, usually in the form of a receipt. Explanation of benefits can also be used as proof of expenses.

4. Employers review the expense

The employer then reviews the employee’s documentation, looking for the service or product, date of service, and the amount spent. If an expense is qualified and documentation includes these three items, the employer will approve the expense.

5. Employees are reimbursed

No money is paid to employees until after the expense is incurred and the employee submits proof of the qualified expense. After the allowance amount has been reached, the employer won’t pay any more funds until the next month or year.

The benefits of an HRA 

Health reimbursement arrangements have many benefits for both the employer and the employee. 

Group health insurance plans are often expensive, limiting the type and amount of coverage employers can offer employees. Group health insurance comes with a high price tag and a lot of work to follow compliance. With HRAs, however, employers can budget the same amount of money for health care, but give the employee the flexibility to choose the type of insurance plan that makes the most sense for them. 

HRAs also allow employers the option to better control their cash flow and manage their health care budgets. Instead of waiting to see how much employees spend on their health care in real time, employers can choose the exact amount of coverage they’re going to pay for each employee at the beginning of the year. Another benefit of HRAs for employers is the option to offer different benefit levels for various classes of employees. For example, truck drivers or warehouse workers may be offered a different level of benefit than call center employees. 

For employees, HRAs offer more choices for where and how they get the care they need. For those with an individual coverage HRA, they can choose the health insurance plan, network, and price that works best for them. Employees can save on medical costs without using their personal funds. Many employees choose HRAs to help with budgeting for health care expenses, offsetting deductibles or premiums, and paying for medical expenses that aren’t covered by insurance. 

HRAs are tax-free for both employers and employees. Employees can use their HRA funds tax-free on IRS-approved spending, and funds in HRAs aren’t counted as taxable income. Employers can claim the money they put in employee HRAs as tax deductions.

HRAs also allow small businesses that may not have been able to offer any health care benefits to employees the chance to contribute in some way.

Using HRAs 

Just like there are many different types of health reimbursement arrangements, there are also many ways employers can choose to use HRAs to support their employees without breaking their budget. These methods include:

• General purpose HRAs cover all IRS-approved health care expenses
• Medical and prescription HRAs are just like they sound, only covering medical and prescription expenses
• Medical only HRAs only cover qualified medical expenses
• Limited purpose HRAs are restricted to only covering vision and dental expenses 
• Members pay first HRAs are set up so the employee must meet an initial deductible before any HRA funds will be distributed
• Retirement HRAs are restricted to post-retirement benefits

How an employer uses an HRA will, in part, be determined by: 

• The type of HRA chosen
• How much they plan to contribute to each employee’s HRA
• How they want to support employee’s health care through HRA offerings

Tap into the potential of HRAs 

The expansion of HRAs provides Americans who enroll in traditional or individual health plans more affordable and flexible health insurance options; which in turn will help them to save on prescription medications and reduce their medical expenses overall. 

The potential growth of this trend is expected to result in an increase in healthcare technology platforms, allowing businesses to seamlessly integrate with health reimbursement arrangements. This level of technology will help employers and consumers take advantage of the untapped potential of their HRAs. Soon, the growing number of people with HRAs will have the opportunity to use the convenient technology and learn more about their healthcare options.

KindHealth is co-founded by Albert Pomales, Andrew Tomasik, Mark Adams and John Constantine. KindHealth offers a full insurance marketplace of health, dental, vision, prescription discounts, and Medicare insurance on a digital AI-powered platform that includes more than 250 insurance carriers and important Healthcare.gov plans.