A Comprehensive Overview of Health Reimbursement Arrangements

What are Health Reimbursement Arrangements

In the world of employee benefits, employers frequently seek tax-advantaged solutions that empower them to manage costs more effectively. The Health Reimbursement Arrangement (“HRA”) is a valuable benefit worth considering.  These tax-advantaged plans allow employers to reimburse certain medical and dental expenses without impacting payroll or payroll taxes. 

After the passage of the Affordable Care Act on March 23, 2010, HRAs were effectively shut down by health plan mandates. The IRS and DOL further clamped down on HRAs with several adverse rulings and guidance in 2013. Then, a new day for the HRA appeared in 2017, with the door opening to the QSEHRA. This was followed in 2020 by the allowance of the ICHRA and EBHRA.

This exploration will not include the discussion of any Form 1094/1095 filing requirements or the filing and payment of the Patient Centered Outcome Research Institute (“PCORI”) fee. It’s also important to note that other issues may need to be considered before adopting such a plan.

While these plans are fully employer-funded, they allow great flexibility in plan design. We’ll cover the following plans and explore the opportunities of each:

• Qualified Small Employer Health Reimbursement Arrangement (“QSEHRA”)
• Individual Coverage Health Reimbursement Arrangement (“ICHRA”)
• Excepted Benefit Health Reimbursement Arrangement (“EBHRA”)
• Integrated Health Reimbursement Arrangement (“IHRA”)
• Specialty Health Reimbursement Arrangement (“SHRA”)
• Retiree Health Reimbursement Arrangement (“RHRA”) 

Types of Health Reimbursement Arrangement Plans 

Qualified Small Employer Health Reimbursement Arrangement

The QSEHRA provides a way for small employers with less than 50 employees to contribute towards their employees’ health care costs without adopting a group medical plan. A QSEHRA allows small employers to provide non-taxed reimbursements for medical expenses, such as health insurance premiums, co-pays, deductibles, and over-the-counter items. The employee must maintain health insurance coverage to be reimbursed. The employer cannot offer a group health plan or a health flexible spending arrangement.

With a QSEHRA, employers can decide annually the amount they'll contribute to their employees’ health care costs. The IRS sets an annual maximum contribution, currently $5,850 for those with self-only coverage and $11,800 for household coverage. Employees pay their provider or insurance company for their premiums, then submit proof of payment of healthcare expenses to be reimbursed by the QSEHRA. If an employee doesn’t submit a claim, the employer keeps the money, though they may choose to roll it over from year to year while the employee is still employed by the business. Typically, QSEHRA amounts claimed by employees are paid monthly by their employer. Any amounts accumulated before termination of employment are usually forfeited.

Individual Coverage Health Reimbursement Arrangement

The ICHRA allows employers of any size to contribute towards their employees’ health care costs without adopting a group medical plan. An ICHRA allows employers to provide non-taxed reimbursements for medical expenses, such as health insurance premiums, co-pays, deductibles, and over-the-counter items. The amount to contribute is determined by the employer without any IRS limits.

Applicable Large Employers (“ALEs”) can avoid the Employer Shared Responsibility Penalty (“ESRP”) by contributing the affordability percentage with reference to the employee’s self only lowest cost silver plan premium (“LCSP”). The Centers for Medicare and Medicaid Services (“CMS”) provides a lookup table by ZIP Code and age to help the employer determine the LCSP for each employee. Below is an example of an ALE employee affordability determination.

Employee Affordability Determination 

To be considered affordable, the cost of health insurance for an employee must not be more than 8.39% of the employee’s W-2 income or other affordability safe harbor. The LCSP provides the monthly premium for the calculation, with the employer’s ICHRA contributions being subtracted from the premium.

That means the monthly premium for the LCSP, minus the ICHRA monthly allowance being offered, should not exceed 8.39% of the employee’s W-2 income for the month. If this requirement is met, the ICHRA is considered affordable.

Formula:
W-2 income * .0839 = X

X/12 = Y

LCSP - Y = minimum affordable ICHRA monthly allowance

Example:
Sammy is an employee at Big Burger, LLC, with a W-2 of $45,000. His employer is offering an ICHRA. The LCSP is $550, based on his age and ZIP Code. The calculation for affordability in this case is:

$45,000 * .0839 = $3,775.50

$3,775.50 / 12 = $314.63

$550 - $314.63= $235.37

In this scenario, the lowest allowance that can be considered affordable to the employee is $235.37.

The ICHRA is flexible enough to be provided to one employee classification while providing traditional group coverage to another employee classification, such as salaried versus hourly employees. The employer just cannot offer the choice between group coverage or the ICHRA.

For example, an employer has a group health plan available to all employees in the contiguous United States. However, it also has an employee in Puerto Rico and one in Hawaii that it wants to help with healthcare costs. The ICHRA is the perfect fit to provide benefits based on geographical location.

Excepted Benefit Health Reimbursement Arrangement

Employers of any size can offer an EBHRA to supplement their group health coverage without being constrained by the requirements for IHRAs. Excepted benefits include out-of-pocket medical expenses other than premiums for individual health coverage, Medicare, or non-COBRA group coverage. However, reimbursements can include dental and vision premiums and expenses. The required employer health plan coverage cannot be through an ICHRA.

The 2024 contribution limit is $2,100, and any unused funds can rollover from year to year. The benefits must be available to all similarly situated employees. Employees are not required to participate in the employer’s group coverage to receive benefits through the EBHRA.

Integrated Health Reimbursement Arrangement

Many employers offering a traditional group health plan face annual rate hikes and high premium costs. To offset those rising costs, employers often move to a higher deductible health plan, which leaves employees with more out-of-pocket exposure. In these cases, offering an IHRA alongside the group health plan can help bridge the gap between offering a high-quality health benefit and minimizing both premium and out-of-pocket costs.

For employers with a lower deductible plan, an IHRA can amplify the health benefit significantly to help cover expenses not fully paid for by the group plan, such as mental health services, family planning costs, and more.

By supplementing the group health plan with an IHRA, the company can give the employees more control over their health benefits and stand out against the competition to better recruit and retain employees in today’s labor market.

Specialty Health Reimbursement Arrangement

As healthcare becomes more holistic and society continues to morph and change, the types of benefits employees are interested in is changing as well. Employers should consider whether the run-of-the-mill health insurance package is still attractive in a post-Covid world, and whether their employees are looking for more flexibility in their health benefits. The SHRA may be disease specific according to the employer’s demographics.

Retiree Health Reimbursement Arrangement

As implied by the name, RHRAs are HRAs that are available only to former employees of employers offering the benefit. There is no qualifying insurance associated with RHRAs; individuals may be enrolled in any coverage type (or may be uninsured) and still have a RHRA.

There is no IRS limit on the amount employers may contribute to an individual’s RHRA, but employers must establish a reimbursement limit when setting up the benefit offering. The employer also would specify the reimbursement limit period. For example, an employer may specify that the reimbursement limit applies for a calendar year. Employers offering RHRAs may further restrict the types of medical and health services that are eligible for reimbursement.

RHRA funds can be used for the medical expenses incurred by the former employee, the former employee’s spouse, and dependents (including those of deceased employees), and the former employee’s children younger than 27 years of age at the end of the year.

Choosing the Rights Health Reimbursement Arrangement 

Health reimbursement arrangements offer options for employers seeking solutions to manage healthcare costs effectively, and each plan presents unique advantages for specific organizational needs.

Employers need to consider factors like affordability, plan integration, and compliance requirements when choosing an HRA. Advisors can help you explore the options, and which best support your organization. 

Ready to optimize your employee benefits strategy with Health Reimbursement Arrangements? Contact us today to explore your options and take control of your healthcare costs.