What Every Employer Needs to Know About HRAs

employer-meeting

Health Reimbursement Arrangements (HRAs) are a great way to give employees a way to save, manage, and spend employer-provided healthcare funds. It’s also an excellent tool for you as an employer to control healthcare costs while still helping employees afford the care they need.

How does an HRA work?

HRAs allow employees to pay directly for various healthcare expenses rather than through increased insurance premiums. Funds are tax-deductible to both the employee and employer, providing advantages to both sides.

HRAs pair well with high-deductible plans as a way for your organization to control healthcare costs while giving your employees tools to pay for their healthcare expenses.

Company size requirements

Generally, employers of any size can offer individual coverage HRAs, as long as individuals are not self-employed.

For Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) however, employers must have 50 or fewer employees. Small employers can also enroll in the Small Business Health Options Program (SHOP), which can provide a tax credit that saves up to 50% of employer contribution for two consecutive years.

Contribution limits

Employers have flexibility when it comes to HRA contributions -- there are no minimum or maximum contribution limits.

Employees can contribute $1,800 per calendar year as of 2020, regardless of family status. An IRS procedure released in October 2020 stated that the limit will remain $1,800 for 2021.

Owner eligibility

 Offering an HRA primarily benefits the employees, with some employers being ineligible to participate. Here is the eligibility for a few types of owners:

  • C-Corporation owners: A C-Corp is a legal entity separate from the owners, so C-Corp owners can participate in HRAs and receive tax-free reimbursements.
  • Sole proprietors: Since there is no distinction between the business and the owner in a sole proprietorship, sole proprietors cannot participate in HRAs. However, if the sole proprietor’s spouse is a W-2 employee, the sole proprietor can receive reimbursements as a dependent of the W-2 employee’s HRA.
  •  Partners: Since partners are directly taxed and are not subject to income taxes, they are not eligible to participate in HRAs. However, they can be reimbursed through the HRA only if their spouse is a W-2 employee who is not a partner.
  • S-Corporation owners: S-Corps are not subject to income tax and therefore a shareholder is not eligible to participate in the HRA. Spouses, parents, children and grandchildren of owners who have more than 2% share of the company cannot participate in the HRA either.

It’s important to remember that even if the owner cannot participate in the HRA, it’s still worth adopting for the employees’ sake.

Employee choices

HRAs offer choices when it comes to how individuals use their funds. Employees can use the tax-free dollars to pay for eligible healthcare products and services. But according to a 2019 final ruling by the U.S. departments of Health and Human Services, Labor and the Treasury, employees can use employer-funded ICHRAs to buy individual-market insurance, including insurance purchased on public exchanges.

Types of HRA Plans Available

Did you know there are numerous HRA plans to choose from? You are never confined to just one type. Below are some of the plans that are available to you:

  • Integrated HRA: The most common HRA that is integrated with a traditional health insurance plan. This can be used to cover coinsurance, deductibles, copays, and uninsured medical expenses.
  • Cost Sharing HRA - employee pays first: This plan is designed for the business and employee to share in the cost of benefits. It can be designed to cover all expenses covered by Integrated HRA, but the first portion of the deductible is paid by the employee.
  • Cost Sharing HRA - percentage based payout: Designed for the business and employee to share in the cost of benefits, this plan can be used to cover all of the expenses covered by an Integrated HRA, but includes a portion of the coverage to be paid by the employee to share the cost.
  • Cost-sharing HRA - donut plan: Designed for the business and employee to share in the cost of benefits, this plan can be utilized to cover all expenses covered by an Integrated HRA, but a portion of the coverage must be paid by the employee.
  • Cost Sharing HRA - split co-pay: This plan is designed for the business and employee to share in the cost of benefits. It can include all expenses covered by an Integrated HRA, but includes a portion of the coverage to be paid by the employee to share the cost.

Tax credits

As mentioned before, the SHOP offers the Small Business Health Care Tax Credit that can save up to 50% of employer contribution for two consecutive years.

Employees also should pay attention to their tax credit status under HRAs. Individuals can qualify for the premium tax credit to help pay for Marketplace coverage only if the individual does not accept the individual coverage HRA and the HRA is considered unaffordable as per the affordability guidelines.

What makes Clarity HRA different

Not all HRA programs are the same. To help employers provide the best possible benefits experience to their teams, we’d like to point out some unique features of Clarity’s HRA.

Clarity will work closely with you to design a plan that works best for your individual company as well as provide tools to monitor its effectiveness. Some common plan designs include:

  • First Dollar Coverage HRA: The HRA covers first dollar health care deductible until the HRA is exhausted.
  • HRA with Employee Deductible: Your company sets an out-of-pocket limit that employees will incur before the HRA starts to pay for expenses.
  • Percent-Based HRA: The HRA is designed to reimburse employees for a percentage of their healthcare expenses.
  • BenefitConnect: This service complements your HRA programs by providing a seamless and paper-free experience for employees using our FSA and HRA programs. Users can enroll to track deductible spend, substantiate card transactions, or automatically reimburse eligible expenses. To read more about BenefitConnect, click here.

By designing an HRA plan with Clarity, you can control your organization’s healthcare costs while ensuring employees are covered. Get started today by learning more about Clarity HRAs.

Sources:

https://www.healthcare.gov/small-businesses/learn-more/qsehra/

https://decisely.com/complete-guide-hras-everything-you-need-to-know/

https://www.healthcare.gov/small-businesses/learn-more/individual-coverage-hra/

https://www.benefitnews.com/opinion/new-hra-in-2020-what-employers-need-to-know

https://www.peoplekeep.com/blog/hra-eligibility-by-type-of-small-business-owner#:~:text=HRA%20Eligibility%3A%20Sole%20Proprietors&text=Therefore%2C%20sole%20proprietors%20aren't,receive%20the%20benefit%20tax%2Dfree.

https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/new-final-rule-lets-employees-use-hras-to-buy-health-insurance.aspx