The Pros and Cons of HRA Accounts: A Comprehensive Guide

Health reimbursement arrangements, also known as HRAs, have become increasingly popular in recent years. These accounts allow individuals and their employers to set aside funds to cover qualified medical expenses. They offer flexibility and control over healthcare spending, but they also have their drawbacks. In this article, we will explore the ins and outs of HRA accounts, including their benefits, drawbacks, strategies for maximizing their benefits, common questions, and alternative options.

Understanding HRA Accounts

What You Need to Know About Health Reimbursement Arrangements

Health reimbursement arrangements, or HRAs, are employer-funded accounts that reimburse employees for eligible medical expenses. Unlike other types of healthcare accounts, such as FSAs or HSAs, HRAs are solely funded by the employer. This means that employees don't contribute to the account directly. Instead, they can use the funds allocated to them by their employer to pay for qualified medical expenses.

One of the key advantages of HRAs is that they offer flexibility. Employers can choose how much money to contribute to each employee's account, and employees can use the funds to pay for a wide range of qualified expenses, including doctor visits, prescriptions, and even certain over-the-counter items. The exact list of eligible expenses may vary depending on the employer's plan, so it's important to familiarize yourself with the specific guidelines of your HRA.

HRAs are designed to provide employees with a convenient way to manage their healthcare expenses. By having an HRA account, employees can easily access the funds they need to cover medical costs without having to pay out-of-pocket and wait for reimbursement. This can be especially beneficial for individuals who require regular medical treatments or have chronic conditions that require ongoing care.

Furthermore, HRAs can also help employees save money on their healthcare expenses. By using pre-tax dollars to pay for eligible expenses, employees can effectively lower their taxable income. This can result in significant cost savings, especially for those with high medical expenses.

Understanding Types of HRAs

Two primary types of HRAs are notable in 2024: Individual Coverage HRAs (ICHRAs) and Qualified Small Employer HRAs (QSEHRAs).

Individual Coverage HRAs (ICHRAs)

The ICHRA is a versatile health benefits solution designed to cater to businesses of any size. With an ICHRA, employers can reimburse employees for premiums and out-of-pocket medical expenses. A significant advantage of this approach is the flexibility it offers; businesses can differentiate reimbursement rates based on job-specific criteria such as:

• Employment status: Full-time vs. Part-time employees
• Geographical location: Adjusting rates for cost-of-living variations
• Family size or age: Tailoring based on personal circumstances

Employees benefit by having the freedom to select their own healthcare providers and insurance plans that best meet their needs.

Advantages:

• Flexibility for All Sizes: ICHRAs cater to businesses of any size.
• Employee Choice: Employees can select their preferred healthcare providers and plans.
• Customizable Reimbursements: Employers can vary reimbursement rates based on criteria such as job role and geographic location.
• Versatile Usage: Employees may utilize ICHRA funds to cover insurance premiums, medical expenses, or both.
• Special Enrollment: Offering an ICHRA makes employees eligible for a special enrollment period, allowing them to purchase major medical plans outside the usual open enrollment window.
• Fund Rollover: Unspent funds may roll over annually or month-to-month, depending on employer discretion.

Disadvantages:

• Non-Transferable Funds: If an employee leaves the company, the funds are retained by the employer, although the employee retains their health plan.
• Combination Limitations: Combining ICHRAs with group plans are not possible.
• Regional Market Variability: Limited options in weaker individual insurance markets could impact employee choice.
• Exclusion of Sharing Ministries: Current regulations exclude sharing ministry plans.

Qualified Small Employer HRAs (QSEHRAs)

he QSEHRA is tailored specifically for small businesses with fewer than 50 employees. This HRA allows these companies to provide tax-free reimbursements to employees for their medical expenses and individual health insurance premiums. Key features of the QSEHRA include:

• Uniform Offering: It must be offered on the same terms to all eligible employees, although reimbursements can be scaled according to family size or age.
• Employee Autonomy: Like ICHRA, QSEHRA empowers employees to choose their own insurance plans and healthcare providers.

Advantages:

• Small Business Focus: Designed for businesses with 50 or fewer employees.
• Employee Autonomy: Employees select their healthcare providers and plans.
• Scalable Reimbursements: Contribution rates can be adjusted based on family size or age, ensuring equitable distribution.
• Diverse Uses: QSEHRA funds can be applied to insurance premiums, medical expenses, or both.
• Special Enrollment Periods: Similar to ICHRAs, QSEHRA participants get special enrollment periods to purchase individual market plans.

Disadvantages:

• Non-Transferable Funds: Employers retain unused funds when an employee leaves.
• Contribution Limits: Annual contribution limits may restrict the amount employers can provide.
• Group Plan Compatibility: Employees might prefer existing group plans, potentially limiting QSEHRA adoption.
• Market Dependent: The strength of local individual insurance markets can affect available options.

By choosing between ICHRAs and QSEHRAs, employers can provide tailored healthcare support that meets diverse needs and preferences.

What are the Rules for ICHRAs and QSEHRAs?

Each has its own set of rules and benefits. Let's dive into the specifics.

Rules for ICHRA

Eligibility and Contributions

• Eligibility: Businesses of any size can offer ICHRAs. However, employers must ensure that employees enrolled in an ICHRA have individual health insurance coverage.
• Contribution Flexibility: Employers can vary reimbursement amounts based on job-based criteria such as full-time versus part-time status, geographic location, or employee classifications.
• Usage: ICHRA funds can be used to reimburse insurance premiums, medical expenses, or both, depending on how the employer designs the plan.
• Special Enrollment: Offering an ICHRA qualifies employees for a special enrollment period in the individual insurance market.

Portability and Rollover

• Portability: Funds are not transportable; they stay with the employer if the employee leaves. However, the health plan purchased with ICHRA funds remains with the employee.
• Rollover: Unused funds can roll over yearly or monthly at the employer’s discretion.

Rules for QSEHRA

Eligibility and Contributions

• Eligibility: QSEHRAs are available to small businesses with fewer than 50 employees.
• Uniformity: Reimbursement amounts must be consistent across all employees. However, amounts can be scaled by family size or age.
• Contribution Limits: There are annual contribution limits set by the IRS, which cap the amount an employer can reimburse.

Usage and Enrollment

• Usage: Employees can use QSEHRA funds for insurance premiums, qualified medical expenses, or both, depending on the plan’s design.
• Special Enrollment: Like ICHRA, offering a QSEHRA creates a special enrollment period for employees in the individual insurance market.

Portability and Other Considerations

• Portability: Similar to ICHRAs, QSEHRA funds do not transfer with the employee if they leave the company.
• Additional Benefits: Sharing ministry plans are generally ineligible for ICHRA but may be reimbursed for medical expenses under recent regulations for QSEHRAs.

Key Comparisons and Additional Resources

• Interested in how these compare to Health Savings Accounts (HSAs)?
• How do they stack up against traditional group plans?

For further information, you may want to explore:

• Comparing ICHRA vs. QSEHRA
• Differences between HRAs and HSAs
• Group Plans vs. Individual Coverage under HRAs

Understanding these rules can help you make informed decisions when choosing the right HRA for your business.

Can HRAs be Combined with Group Health Plans?

Yes, Health Reimbursement Arrangements (HRAs) can be combined with group health plans, but the type of HRA matters. A Qualified Small Employer HRA (QSEHRA) or a traditional HRA can be used alongside a group health plan to reimburse employees for medical expenses not fully covered by their insurance, such as deductibles, copayments, or other out-of-pocket costs.

However, if an employer offers an ICHRA or QSEHRA, employees cannot participate in a group health plan and must instead purchase individual health insurance to receive tax-free reimbursements. Understanding which HRA can be paired with a group plan is essential for employers to build flexible, tax-efficient benefits for their workforce.

What Are the Pros of HRAs for Businesses?

HR offer several significant advantages for businesses, including:

Flexible for Any Business Size

HRAs are adaptable to businesses of all sizes. There are variants that cater to smaller businesses (fewer than 50 employees) and others that scale to larger companies. This flexibility ensures that businesses can tailor the program to suit their specific needs without being constrained by size.

Employee Choice and Control

One of the standout benefits of HRAs is that they empower employees to pick their own healthcare providers and plans. This autonomy not only enhances employee satisfaction but also ensures that they get the coverage that best meets their individual needs.

Customizable Reimbursement Rates

HRAs can be customized to offer different reimbursement rates based on job-related criteria such as full-time vs. Part-time status or geographical location. This allows companies to strategically allocate benefits in a way that aligns with their organizational goals and employee demographics.

Versatile Spending Options

Depending on how the HRA is structured, employees can use these arrangements to pay for a variety of expenses including insurance premiums, medical costs, or both. This versatility enhances the utility of the HRA, making it a more comprehensive benefit for employees.

Special Enrollment Periods

When a business provides an HRA, employees gain access to a special enrollment period for purchasing individual health insurance. This means they aren't restricted to the usual open enrollment dates, giving them greater flexibility in managing their healthcare.

Rollover Flexibility

Unused HRA funds can roll over to the next year at the employer's discretion, which can encourage employees to use their healthcare benefits wisely. On a monthly basis, these funds also roll over, ensuring consistent support for ongoing medical expenses.

In summary, HRAs offer businesses a flexible, customizable, and employee-friendly way to manage healthcare benefits, making them an excellent choice for companies looking to enhance their benefits package.

What are the Cons of HRAs for Businesses?

No solution is without its drawbacks. The cons of an HRA include:

Employer Control

‍Since HRAs are employer-funded, the employer has control over the funds in the account. This means that if you leave your job, you may no longer have access to the funds remaining in your HRA. It's important to consider this aspect when evaluating the long-term benefits of an HRA.

Limited Eligibility

‍Some employees may not be eligible for an HRA, depending on their employment status or the specific terms of their employer's plan. It's crucial to review the eligibility requirements and understand whether you qualify for an HRA before making any healthcare decisions.

Rolling Over Funds

‍Unlike other healthcare accounts, HRAs generally do not allow employees to roll over funds from year to year. Any unused funds at the end of the plan year typically go back to the employer. This means that employees need to carefully plan and utilize their HRA funds within the specified time frame to avoid losing any unused benefits.

How Do Weak Individual Insurance Markets Impact HRAs?

When individual insurance markets are weak, Health Reimbursement Arrangements (HRAs) face several challenges that can affect both employers and employees. Here’s how:

1. Limited Plan Options: In weak markets, employees might find fewer health insurance plans available. This limits their ability to choose a plan that best fits their medical needs and financial situation.
2. Potential Contribution Limits: Certain types of HRAs, like Qualified Small Employer HRAs (QSEHRAs), have yearly contribution limits set by regulations (e.g., 2023 limits). These limits might prevent employers from providing as much financial assistance as they would like.
3. Higher Premiums: Weak insurance markets often have higher premiums due to less competition among insurers. Employees may find that their HRA funds do not stretch as far, potentially leading to higher out-of-pocket costs.
4. Reduced Employee Satisfaction: The combination of fewer choices and higher out-of-pocket expenses can lead to dissatisfaction among employees. This could impact overall morale and even retention rates.
5. Administrative Complexity: Employers might need to spend more time and resources helping employees navigate the limited options available, increasing the administrative burden associated with managing HRAs.

Weak individual insurance markets can undermine the effectiveness of HRAs by limiting choices and increasing costs, making it harder for both employers and employees to achieve their healthcare goals.

Despite these drawbacks, HRAs can still be a valuable tool for managing healthcare expenses. It's important to carefully evaluate your own healthcare needs and consider the specific terms and conditions of your employer's HRA plan before making any decisions. By understanding the ins and outs of HRAs, you can make informed choices that best suit your individual circumstances.

Getting Started with HRAs: A Step-by-Step Guide for Employers

Jumping into Health Reimbursement Arrangements (HRAs) might sound daunting, but it's simpler than you think. Here’s a straightforward guide on how employers can get started with HRAs:

1. Understand the Basics

Before diving in, familiarize yourself with what HRAs are and how they work. An HRA is an employer-funded plan that reimburses employees for qualified medical expenses. This can cover a variety of costs including premiums for individual health insurance policies.

2. Choose the Right HRA

HRAs come in different forms, such as:

• Qualified Small Employer HRA (QSEHRA): Ideal for small businesses with fewer than 50 employees.
• Individual Coverage HRA (ICHRA): Suitable for businesses of any size and offers flexible coverage options.
• Excepted Benefit HRA (EBHRA): Can be offered in conjunction with traditional group health plans.

3. Determine Your Budget

Decide how much you want to allocate towards employees' HRAs. Since this is an employer-funded plan, establishing a clear budget helps in managing your finances effectively.

4. Set Up the HRA

Partner with a reliable third-party administrator (TPA) like Venteur to set up your HRA. We offer industry-leading technology that streamlines the process and ensure compliance with regulations. We assist you in designing the plan, managing reimbursements, and providing necessary documentation.

5. Communicate with Employees

Effective communication is crucial. Inform your team about the details of the HRA, including:

• How they can utilize the HRA.
• What expenses are covered.
• The process for submitting claims.

6. Monitor and Adjust

After implementation, continuously monitor the HRA’s performance. Gather feedback from employees and make adjustments as necessary to ensure it meets everyone's needs.

Maximizing the Benefits of HRA Accounts

How to Make the Most of Your Health Reimbursement Arrangement

If you have an HRA account, there are several strategies you can employ to maximize its benefits:

1. Plan Ahead: Take the time to understand the timelines and rules of your HRA plan. By planning ahead, you can make the most of your HRA benefits and ensure that you don't miss out on any eligible expenses.
2. Track Your Expenses: Keeping track of your eligible expenses is crucial. This will help you stay within your budget and avoid any surprises down the road. Many employers provide online portals or mobile apps to help employees track their HRA expenses.
3. Coordinate with Other Benefits: If you have other healthcare benefits, such as an FSA or an HSA, make sure to coordinate your spending. By strategically using your different accounts, you can optimize your savings and minimize out-of-pocket expenses.

Strategies for Maximizing HRA Account Benefits

Here are a few additional strategies you can use to make the most of your HRA account benefits:

• Explore Telemedicine Options: Many HRA plans cover telemedicine services. Utilizing virtual doctor visits can save time and money, especially for routine consultations.
• Take Advantage of Preventive Care: Most HRAs cover preventive care services, such as vaccinations and screenings, at 100%. By staying up to date with your preventive care, you can catch potential health issues early and avoid costly treatments later on.
• Research In-Network Providers: If your HRA plan includes a network of preferred providers, using in-network services can help you save money. Before making any healthcare decisions, be sure to check if your preferred providers are within your plan's network.

Common Questions About HRA Accounts

Frequently Asked Questions About Health Reimbursement Arrangements

Here are some common questions people have about HRA accounts:

Can I carry over unused funds from year to year? 

Generally, HRAs do not allow for the rollover of funds. Any unused money at the end of the plan year typically goes back to the employer.

What happens to my HRA if I change jobs? 

In most cases, if you change jobs, you will not be able to take your HRA funds with you. Funds are not transportable; they stay with the employer if the employee leaves the company. However, you may have the option to use the remaining funds within a certain period of time after leaving your job. It's important to check the specific rules of your HRA plan.

On a positive note, even if the funds are not transportable, the employee keeps their health plan. This means you can still benefit from the health coverage, though the financial aspect tied to the HRA will remain with your previous employer.

To summarize:‍

HRA Funds: Generally not transportable.

‍Remaining Funds: May be usable within a set period after leaving.

Health Plan: Stays with you, ensuring continued coverage.

What expenses are eligible for reimbursement? 

Eligible expenses may vary depending on your employer's plan. Generally, expenses such as doctor visits, prescriptions, and medical supplies are eligible. Some plans may also cover alternative treatments like chiropractic care or acupuncture. Be sure to review your plan documents or consult with your employer for a comprehensive list of eligible expenses.

Are Sharing Ministry Plans Eligible for Reimbursement Under HRAs?

Sharing ministry plans have specific regulations regarding their eligibility for reimbursement under HRAs (Health Reimbursement Arrangements).

ICHRA Restrictions

• Ineligible for ICHRA: At present, sharing ministry plans do not qualify for reimbursement under Individual Coverage Health Reimbursement Arrangements (ICHRA). This is due to regulatory definitions and limitations pertaining to what constitutes valid health insurance coverage under ICHRA rules.

QSEHRA Reimbursement Potential

• Proposed Changes: Recently, proposed regulations are set to clarify the landscape around sharing ministry plans and Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs).
• Medical Expense Reimbursement: While these plans may not be classified as health insurance, they can still be reimbursed as a medical expense under QSEHRAs. This development could offer greater flexibility for employees looking to manage their healthcare costs through QSEHRAs.

These evolving regulations are encouraging as they aim to provide clearer guidance on how sharing ministry plans fit within the framework of HRAs. Though ineligible for ICHRA, the ability to classify these as reimbursable medical expenses under QSEHRAs represents a positive step forward.

Clearing Up Misconceptions About HRA Accounts

There are several misconceptions surrounding HRA accounts. Let's address a few of them:

• Misconception 1: HRAs are the same as HSAs. First, let's clear up some confusion: an HRA is not a reimbursement account like an HSA or an FSA. It's a reimbursement arrangement. There’s no account set aside into which employees make contributions. Instead, health reimbursement arrangements are entirely funded by employers. This fundamental difference in structure is crucial for understanding how HRAs and HSAs operate within the broader landscape of healthcare benefits. While both types of accounts help with healthcare costs, they differ significantly:
  • Funding: HRAs are fully funded by employers, whereas HSAs can be funded by both employees and employers.
  • Structure: HRAs are reimbursement arrangements, not accounts. This means there is no set account for employee contributions.
  • Carryover Rules: HSAs allow funds to be carried over from year to year, while HRAs may have different rules depending on the employer's plan.

• Misconception 2: HRA funds can be used for any expense. While HRAs do offer flexibility, the funds can only be used for eligible medical expenses as defined by your employer's plan and IRC 213-D regulations.

• Misconception 3: HRAs are only for large companies. HRAs are becoming more popular among companies of all sizes. Many small and medium-sized businesses offer HRAs to their employees as a way to enhance benefits and attract top talent. Check with your employer to see if they offer an HRA.

Exploring Alternative Options to HRA Accounts

Are Health Reimbursement Arrangements the Right Choice for You?

While HRAs have their advantages, they may not be the right choice for everyone. It's important to consider your individual healthcare needs and preferences. Here are a few alternative options to consider:

• Flexible Spending Accounts (FSAs): Similar to HRAs, FSAs allow you to set aside pre-tax dollars for eligible medical expenses. However, unlike HRAs, FSAs are employee-funded and usually require you to use the funds within the plan year.
• Health Savings Accounts (HSAs): HSAs are available to individuals with high-deductible health plans. They offer tax advantages and allow you to save for future healthcare expenses. Unlike HRAs, HSAs are individual accounts that can be carried over from year to year.
• Direct Payment Arrangements: Some employers offer direct payment arrangements, where they pay for medical expenses directly instead of providing employees with an HRA or other healthcare account. This option eliminates the need for employees to submit claims for reimbursement but may have different eligibility requirements and limitations.

Comparing ICHRAs, QSEHRAs, and Group Plans: What's Best for Your Business?

When deciding on the best healthcare option for your business, it's crucial to understand the differences between Individual Coverage Health Reimbursement Arrangements (ICHRAs), Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs), and traditional group plans.

ICHRAs: Individualized Flexibility

Key Features:

• Customization: Employers can set different reimbursement rates for various classes of employees.
• Coverage: Employees purchase individual health insurance plans that suit their needs.
• Flexibility: Employers can include out-of-pocket and other eligible medical expenses.

Pros:

• Tailored benefits for different employee categories.
• Potentially lower administrative burden.

Cons:

• Employees must shop for their own health insurance, which may be time-consuming.
• Not all individual plans may cover essential health benefits.

QSEHRAs: Ideal for Smaller Employers

Key Features:

• Eligibility: Available only to companies with fewer than 50 full-time employees.
• Reimbursements: Employers can reimburse premiums and medical expenses tax-free.
• Regulations: Strict contribution limits and compliance requirements apply.

Pros:

• Tax advantages for both employers and employees.
• Simplified administration compared to traditional group plans.

Cons:

• Contributions are capped, potentially limiting benefits.
• May not be as attractive to employees used to traditional group plans.

Group Plans: The Traditional Route

Key Features:

• Uniform Coverage: All employees receive the same benefits under a single policy.
• Employer Managed: The employer selects and manages the plan.
• Stable Costs: Costs are often predictable, with shared risk between employer and insurer.

Pros:

• Wide acceptance among employees.
• Usually provide comprehensive coverage with minimal employee effort in plan selection.

Cons:

• Can be more expensive for employers.
• Less flexibility in tailoring benefits to individual employee needs.

Conclusion

Choosing between ICHRAs, QSEHRAs, and group plans depends on the specific needs and size of your business, as well as your employees' preferences.

• For customization and flexibility, ICHRAs are often the best choice.
• If you're a small employer seeking tax advantages and simpler administration, QSEHRAs could be ideal.
• For comprehensive, well-understood coverage, traditional group plans remain a solid option.

Considering Other Health Benefit Options

If an HRA account doesn't meet your needs, there are other health benefit options that you can explore:

• Health Maintenance Organizations (HMOs): HMOs provide comprehensive healthcare services at a fixed cost. They usually require you to select a primary care physician and obtain referrals for specialists.
• Preferred Provider Organizations (PPOs): PPOs offer more flexibility in choosing healthcare providers. While you can visit doctors and specialists outside of the network, you typically pay less when you use in-network providers.
• Health Savings Accounts (HSAs): As mentioned earlier, HSAs offer tax advantages and allow you to save for future healthcare expenses. They are a good choice if you have a high-deductible health plan and want to take more control over your healthcare spending.

As you can see, HRAs have their benefits and drawbacks. They offer flexibility and cost savings, but they may not be the right choice for everyone. When deciding on the best healthcare account for your needs, consider factors such as your medical expenses, budget, and preferences. Consult with your employer or a healthcare professional to fully understand all your options. Happy decision-making!