Setting up an HRA can provide numerous benefits to employers and employees alike. However, specific requirements may need to be fulfilled depending on the type of Health Reimbursement Arrangement. All kinds of HRAs require funding solely by the employer rather than employee tax deductions, with accounts only able to reimburse for qualified medical expenses verified with evidence.

To learn more about what an HRA is or how it can work for your company, watch the video below, or check out our Guide to Health Reimbursement Arrangements.

Contribution amounts: As the employer, you get to determine how much money can be contributed to your employee's HRAs. However, HRAs such as the QSEHRA and Expected Benefit HRA have annual contribution limits. If you offer your employees a QSEHRA, you can contribute up to $6,150/year for individual employees and $12,450/year for employees with a family. If you offer an Expected Benefit HRA, the annual contribution limit is $2,100. 

ICHRA requirement: The Individual Coverage Health Reimbursement Arrangement (ICHRA) allows employers to provide non-taxed reimbursements to employees for qualified health expenses, such as monthly premiums and co-payments. Employees must be enrolled in an individual health plan to use the reimbursement funds. 

‍QSEHRA requirement: To offer a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), you must have less than 50 full-time employees.

A frequent inquiry we get from business owners is whether they are able to join their company’s HRA. Generally, HRAs should be utilized for the purpose of helping employees with healthcare needs. However, certain proprietors may qualify depending on their tax filing status and the type of organization owned. For an owner to become eligible in a respective HRA plan, it must first acknowledge them as an employee within the said organization – though not all entities consider this arrangement feasible.

Eligible owners:

C-corporation (C-corp): Any corporation that, under U.S. federal income tax law, is taxed separately from its owner or owners. Because a C-corp is a legal entity separate from its owner, that means the owner is considered an employee and can participate in the organization’s HRA.

Ineligible owners:

‍S-corporation owners: These owners aren’t subject to corporate income tax. Instead, shareholders that own more than 2% of the company's shares are taxed individually. That means S-corp owners aren’t considered employees but self-employed, so they aren’t eligible to receive reimbursements through an HRA. 

Due to attribution rules, even if family members are W-2 employees or are on the same insurance policy as the owner, they and the owner are still ineligible.

‍Partners: A partnership is a single business where two or more people share ownership. A partnership is not subject to income tax. Instead, the partners are directly taxed. That means partners are considered self-employed, not employees, and aren't eligible to participate in an HRA. 

However, unlike S-corp owners, partners can receive tax-free reimbursements if they’re married and their spouse is a regular W-2 employee of the organization (not a partner). In this case, the HRA is simply set up in the spouse's name, and the partner can receive tax-free reimbursements as a dependent.

Sole Proprietors: A sole proprietorship is an unincorporated business owned and run by one individual, with no distinction between the business and the owner. Therefore, sole proprietors aren't employees and can't participate in an HRA.

Again, just like with partnerships, if an owner of a sole proprietorship has a spouse who’s a W-2 employee of the business, they can be added as a dependent on their spouse’s HRA and receive tax-free reimbursements through their allowance.

Depending on the type of HRA that you set up, you will be able to distribute different levels of benefits to your employees based on employee category or class. Each HRA type has different employee classes available, and Liferaft experts will guide you toward the right breakdown and HRA type for your business. Here are some examples of ways you can categorize your employees and distribute benefits.

HRA employee classes:

• Full-time employees: Employers can choose whether they define “full-time employment” as averaging 30 hours or more per week, or as averaging 40 hours or more a week. 
• Part-time employees: Employers can choose whether to define “part-time employment” as averaging under 40 hours per week or averaging under 30 hours a week. 
• Salaried: Salaried employees are those who are paid on an annual basis and aren’t eligible for overtime pay.
• Hourly: Hourly employees are those who are paid on an hourly basis and can earn overtime.
• Manager: Employees who are in management-level positions.
• Executive: Employees who are in executive-level positions.‍
• Staff: Employees who are not in leadership positions.

ICHRA-specific employee classes:

• Full-time employees: Employers can choose whether they define “full-time employment” as averaging 30 hours or more a week, or as averaging 40 hours or more a week. If you’re using your ICHRA to satisfy the employer mandate, you must consider full-time employees as those who average at least 30 hours a week.
• Part-time employees: Employers can choose whether to define “part-time employment” as averaging under 40 hours a week or as averaging under 30 hours a week.
• Seasonal employees: This type of employee is hired into a position on a short-term basis.
• Temporary employees of staffing firms: These employees provide temporary services for the organization but are formally employed through a staffing firm.
• Salaried employees: Salaried employees are those who are paid on an annual basis and aren't eligible for overtime pay.
• Hourly employees: Hourly workers, or non-salaried workers, are paid on an hourly basis and can earn overtime.
• Employees covered under a collective bargaining agreement: These employees have entered into a written agreement between the organization and their trade union on the conditions of employment, rate of pay, hours of work, and other working conditions.
• Employees in a waiting period: These are employees who are currently in a waiting period for health benefits. Employers can choose to implement waiting periods of up to 90 days.
• Foreign employees who work abroad: These employees work outside the United States.
• Employees in different locations, based on rating areas: These employees live outside the individual health insurance geographic rating area of the organization’s physical address. If there’s no physical address, like with remote companies, the insurance rating area is where most employees within the insurance company’s plan network live at the beginning of the coverage period.
• A combination of two or more of the above: Employers can also create additional classes by combining two or more of the above classes. For example, you may create a class of full-time employees and choose to alter allowance amounts by the employee’s location, such as offering $500 to employees in one state and $800 to employees in another.

• Employees get to choose their individualized insurance plans and can be reimbursed for out-of-pocket 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.

Are Health Reimbursement Arrangements considered income?

According to the IRS, employer-issued reimbursements are not considered income and are exempt from federal income and payroll taxes. This is one of the significant tax benefits of distributing employee benefits through a Liferaft Health Reimbursement Arrangement.

What happened to unused funds? Do they roll over?

One of the central values of a Liferaft 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 account 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. Put plainly—it’s up to you!

What are some disadvantages of an HRA?

Because the funds in a Liferaft Health Reimbursement Arrangement 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 account funds stay behind with their former employer.  Employers can offer a retirement account 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.

Which employees are eligible for a Liferaft Health Reimbursement Arrangement?

Liferaft Health Reimbursement Arrangements can be offered to any employee, as long as each job class is treated equally. This means you can easily provide benefits to part-time and seasonal employees. However, depending on what type of expenses you plan on reimbursing, there are specific IRS requirements. After learning about your business and goals, Liferaft will make a plan recommendation for the most tax-advantaged, affordable way to structure your account.

Our team knows the ins and outs of the health insurance marketplace and will guide you towards the solution that make the most sense for your business and your team. Come with questions! Our experts are happy to dig into the details to get you the clarity you need.

During the call, Liferaft will run a cost-benefit analysis on your company's current healthcare spending and show you different ways you can save—without sacrificing plan quality. After your consult, Liferaft will design a unique plan for your employee's health insurance, including suggested plans and accounts, plan policy documents, and the annual budget.