Insurance

Guide to Health Reimbursement Arrangements

With a Liferaft Health Expense Account, you can take advantage of the many different health reimbursement arrangements (HRAs) that reimburse employees for out-of-pocket healthcare expenses.

July 22, 2022

What is a Health Expense Account?

A Health Expense Account is an all-encompassing term for the many different health reimbursement arrangements (HRAs) that an employer can set up to reimburse employees for out-of-pocket healthcare expenses. The funds in the account are not subject to taxes and can be used to cover a wide range of healthcare costs, including premiums, co-pays, and dental and vision expenses.

Compared to traditional group health insurance plans, HRAs are more flexible, affordable, and easier to administer. Plus, you can easily tailor plans to fit the specific needs of your employees.

HRA Requirements & Features

There are different requirements for incorporating an HRA depending on the type of health reimbursement account you are setting up. For qualified small employers HRAs (QSEHRAs), your business must have less than 50 full-time employees. For all types of HRAs, the account must be funded entirely by the employer, not through salary deductions, and the accounts can only reimburse employees for qualified and substantiated medical expenses. 

The advantages of HRAs over traditional group insurance are clear: 

  • Employees get to choose their individualized insurance plans and can be reimbursed for out-of-pocket healthcare expenses. 
  • Since there is no pre-funding required, employers can save on upfront costs.
  • Fixed dollar amounts mean that annual premium hikes are a thing of the past.
  • There are no participation requirements, so even if employees don't use the benefit, it won't impact the HRA plan.
  • Employees get tax-free reimbursements, and employers can deduct the reimbursements from taxes, so everybody benefits from tax breaks.
  • Employers have complete financial control over their benefits. Employers decide how much and how frequently to reimburse employees' expenses with broad discretion in deciding who is covered under their plan. 

The administration of an HRA account can take less than 5 minutes a month, allowing the employer to focus on real HR issues.

How an HRA Works

Liferaft makes it easy to set up and administer your Health Expense Account, tailoring your specific plan to fit the needs of your business. 

  • Determine your benefits

You tell us what kind of benefits you want to offer, and Liferaft will design the plan and handles the paperwork. 

  • Notify your team

Let your employees know what you’re covering and the budget. Keep the Liferaft team informed of current staff and turnover. 

  • Health expenses reimbursed 

You can handle health expense review and reimbursement or have Liferaft manage it. Managed accounts start at $5 per employee per month.

What expenses does an HRA cover

An HRA only covers qualified medical and dental expenses, as defined by the Internal Revenue Service (IRS). Eligible expenses include costs to alleviate or prevent a physical or mental ailment, but not expenses for general health maintenance such as vitamins.  

However, even though the IRS may qualify an expense, an employer has the right to exclude it from their HRA plan document outlining reimbursable medical expenses for employees.

HRAs can be used to pay for qualified medical expenses including: 

  • Prescription medications
  • Health insurance premiums
  • Copays and coinsurance
  • Insulin 
  • An annual physical exam 
  • Crutches 
  • Birth control pills 
  • Transportation costs incurred to get medical care
  • Meals while receiving treatment at a medical facility  
  • Care from a psychologist or psychiatrist  
  • Substance abuse treatment, and more.

Here are some examples of items that HRA doesn't cover:

  • Teeth whitening
  • Maternity clothes
  • Funeral services
  • Health club membership fees
  • Controlled substances
  • Childcare for a healthy baby
  • Marriage counseling
  • Non-prescription medications or vitamins

Top Use Cases For HRAs

Offering flexible options for remote or distributed teams 

For employers with remote or distributed teams, it can be challenging to find a national carrier that provides high-quality, accessible and affordable in-network care for all team members. Often employers looking for a group plan have to compromise and provide a more expensive or lower quality plan that can cover all employees. 

Liferaft Health Expense Accounts can save you up to 65% on healthcare costs and give your employees greater flexibility in choosing a plan. If you have remote employees or a distributed team, they can pick from any plan available on the individual exchange, then get a no-tax reimbursement from your Health Expense Account.

Offering benefits for the first time

For companies just starting to provide health benefits for their team, a Health Expense Account is a great option. These plans allow employers to control costs, provide flexibility, and easily scale their benefits as their team grows. 

Most insurers require a certain percentage of eligible employees to participate in the healthcare plan (often 75 percent). These participation requirements often limit smaller employers to offering a single health plan. HRA plans have no participation requirements and give employees the freedom to choose the healthcare plan that works best for their region, family, and health situation. 

Smaller businesses have limited negotiating power and can be stuck with higher premiums than if their employees purchase health insurance through the individual market. As healthcare premiums continue to rise, employers stuck in a small group insurance plan don’t have control over increasing costs. Premium rate increases can present fiscal challenges for new businesses just beginning to offer benefits. 

With an HRA plan, employers decide how much to reimburse their employees, what expenses to repay, and how frequently to process reimbursements. This flexibility makes it easy to set up a plan that works for your business's nuances and budget. 

Providing out-of-pocket coverage in addition to group coverage

As premiums and healthcare-related costs continue to rise, providing additional coverage for out-of-pocket health expenses can attract top talent and boost employee retention.

Through a health expense account, employees can be reimbursed tax-free for costs like deductibles, co-pays, co-insurance, dental and vision premiums, and other qualified expenses not covered by their group health plan. This HRA further reduces the financial burden on employees when they have out-of-pocket health expenses or unexpected medical bills. 

Types of HRA Plans

In the past few years, new regulations have created new HRA types, giving employers even more flexibility over their benefits. For example, it is now possible to use an HRA to reimburse employees for individual health insurance premiums. There are also fewer restrictions on who can be covered by an HRA. Employers can offer HRAs to part-time and seasonal workers, as well as retirees.

See below for information about some of the most popular and flexible HRAs.

When you set up your health expense account with Liferaft, our team will give you free professional advice about how to best set up and structure your HRA plan(s). We'll help you choose the right mix of benefits for your business, create your HRA plan documents, and ensure that your employees are getting the most out of their HRA. 

Click to download comparison chart

QSEHRA

The QSEHRA is a healthcare reimbursement arrangement for small businesses and nonprofits with fewer than 50 full-time employees. It allows employers to reimburse employees for qualified healthcare expenses outlined by the IRS, including individual health insurance premiums.

A QSEHRA is a great option for small businesses or nonprofits who want to offer health insurance without the hassle of managing a group plan. It also gives employees more choice in how they spend their healthcare dollars. Additionally, this HRA type can be used with a Health FSA or HSA, giving employees even more flexibility when paying for their healthcare expenses.

ICHRA

The Individual Coverage Health Reimbursement Arrangement (ICHRA) allows employers to reimburse their employees for individual health insurance premiums and other qualified medical expenses, allowing employees to choose the coverage that best meets their needs. The ICHRA is available to employers of all sizes and requires employees to be covered by an individual health insurance plan or Medicare to be eligible for reimbursement. Employers determine the reimbursement limits, though other rules and restrictions apply.

Overall, an ICHRA is a much simpler and more flexible way of offering health benefits than traditional group plans. If you're an employer looking for a cost-effective way to offer health coverage to your employees, the ICHRA could be a good option.

Excepted benefit HRA

An Excepted Benefit HRA is a good option for employers who want to offer their employees an HRA in addition to a traditional group health plan. This HRA allows employers to offer their employees financial assistance with dental, vision, short-term insurance, and other health-related costs that traditional group health plans may not cover. 

The Excepted Benefit HRA allows for higher employer contributions (currently $1,800 a year) than flexible spending arrangements (FSAs). In addition, unused funds can roll over from year to year.

HRAs vs. FSAs vs. HSAs

There are three types of accounts people use to save for medical expenses: Health Reimbursement Accounts (HRAs), Health Savings Accounts (HSAs), and Flexible Spending Accounts (FSAs). All three acronyms are similar, but there are significant differences between them. 

An HRA is an employer-sponsored account that reimburses employees for qualifying medical expenses. Contributions to an HRA are made by the employer and are not taxed. Withdrawals from an HRA can be used to pay for copayments, deductibles, and other out-of-pocket costs not covered by health insurance. 

An HSA is a tax-advantaged savings account used to pay for qualified medical expenses. Unlike an HRA, contributions to an HSA can be made by either the employee or the employer, and both may claim a federal tax deduction on their annual income taxes. Withdrawals from an HSA can be used to pay for vision care, dental care, prescriptions, and other out-of-pocket costs not covered by health insurance plans. 

An FSA is a type of spending account that allows employees to set aside pretax money from their paycheck to cover qualified healthcare expenses incurred during the plan year. Eligible expenses include copayments, deductibles, prescription drugs, and other out-of-pocket healthcare costs not covered under your regular health insurance plan. 

You can offer your employees access to a Flexible Spending Account (FSA) along with an HRA. Unlike HRAs, FSAs are employee-funded rather than employer-funded through a salary reduction. 

Employers can offer an HSA and an HRA at the same time if they are using an Expected Benefit HRA alongside a qualifying high-deductible group coverage plan. 

How to choose an HRA administrator?

It is crucial to select an HRA administration tool that makes it easy to stay compliant with current regulations, simple to enroll employees, and provides employer training and resources.

When selecting an HRA plan administrator, look for features like automated compliance and software updates and comprehensive employee and employer tools and resources. These components are essential in ensuring a successful HRA program for your organization.

Liferaft handles the compliance and reporting

An HRA plan must have the following legal documentation and be in compliance with various laws to remain operational: a summary of the plan, employee MEC verification, tax reporting, IRS deadlines, year-end W2 reporting, Form 720 (PCORTF), COBRA administration (if not exempt), ERISA, HIPAA and PHI Compliance. 

With our easy-to-use platform, you can easily stay in compliance and manage employee claims, while offering your employees the flexibility they need regarding their healthcare. 

Liferaft Makes Employee Onboarding and Plan Management Simple

When it comes to onboarding and employee communication, Liferaft makes things simple. Our team will provide informative materials for employees to ensure they understand how to get the most out of their plan. Our 100% digital platform is simple and straightforward to use, allowing employees to request reimbursements easily.

Frequently Asked Questions

Are health reimbursement accounts considered income?

According to the IRS, health reimbursement accounts are not considered income. Employer-issued reimbursements are also exempt from federal income and payroll taxes. This is one of the significant tax benefits of distributing employee benefits through a health reimbursement arrangement. 

What happened to unused funds? Do HRAs rollover?

One of the central values of a Health Reimbursement Arrangement is flexibility, and the answer here depends on the employer’s specific policies. Some companies may have a "use it or lose it" policy regarding HRA funds, meaning that any funds not used by December 31st will be forfeited and cannot be carried over into the new year. Other employers allow employees to roll over a certain amount of money from one year to the next. 

What are some disadvantages of an HRA?

Because HRAs are employer-funded, the employer owns the money in the account even though it is for the individual to use. If the person leaves the company or their job is terminated, the HRA funds stay behind with their former employer.  Employers can offer a retirement HRA that allows former employees to utilize funds after leaving the company. 

Additionally, different employers often have different rules for reimbursement, which can be a problem for employees if they switch companies. Aside from mandatory requirements like COBRA continuation, ERISA and HIPAA, plans can vary widely. 

Finally, self-employed persons are not eligible to enroll in an HRA. 

Which employees are eligible for an HRA? 

HRAs can be offered to any employee, as long as each job class is treated equally. For ICHRAs, the employee must have a qualified individual insurance plan. With the QSEHRA, the employee can either be covered by a spouse’s insurance plan or purchase a qualified individual insurance plan. For both the ICHRA and QSEHRA, employees cannot also be offered a group health insurance plan. With EBHRAs only employees who are also covered by their organization's group health insurance—regardless of whether or not they opted in—are eligible. 

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