HRA stands for “Health Reimbursement Arrangement,” a type of employer-provided benefit. It provides employees with assistance in paying their out-of-pocket medical expenses and, in certain instances, their premiums, depending on the specific HRA and how it is structured. There are different types of HRAs employers can offer, and they fund the plans. We’ll get into all the different types of HRAs in this post.
Employees can’t contribute to HRAs with voluntary salary deductions. However, employer contributions to HRAs aren’t considered employee income, so they allow employees to be reimbursed tax-free for qualified medical expenses, up to a set amount determined by the employer for a coverage period. Employers can add as much as they want to HRAs, and balances can typically (but not always) be rolled over into the next year, though they can’t be refunded to employees.
Different types of HRA options to choose
Traditional HRAs, also sometimes called “Integrated HRAs,” are considered group health plans and must be offered in conjunction with a group health insurance policy. Stand-alone HRAs aren’t associated with a group health insurance plan, so employees get their own coverage. They include:
- Group Coverage HRA (GCHRA)
- Qualified Small Employer HRA (QSEHRA)
- Individual Coverage HRA (ICHRA)
- Excepted Benefit HRA (EBHRA)
What is GCHRA?
A Group Coverage HRA (GCHRA) is an Integrated HRA that enables employers to offset the high out-of-pocket employee cost of health insurance deductibles. The GCHRA can only be provided and used if an employee participates in a company’s group health insurance coverage.
Guidelines for a GCHRA include:
- No cap on the employer contribution amount for employee reimbursement;
- A deductible set by the employer;
- Separate classes of employees receiving different contribution amounts, if desired by the employer;
- A percentage of the reimbursable expenses paid by employees, if required by the employer;
- Unused funds may or may not roll over annually, depending on how the programs are designed.
What is QSEHRA?
A QSEHRA, or Qualified Small Employer Health Reimbursement Arrangement, is a type of HRA for groups with fewer than 50 full-time equivalent employees. You, the employer, can only offer a QSEHRA if your organization does not offer a group health insurance plan.
To participate in a QSEHRA, employees must have their own health insurance coverage via the individual market or another employer’s plan (e.g., a spouse’s employer-sponsored plan).
The employee has to have minimum essential coverage (MEC) in order to receive funds from the QSEHRA. If not, any reimbursements they receive from your QSEHRA while without MEC will be included in their taxable gross income. The QSEHRA benefit is also taxable if their health insurance coverage is provided by another employer on a pre-tax basis.
What are QSEHRA contribution limits?
QSEHRAs are funded entirely by employers—employees can’t contribute money to their own HRA.
Employees are reimbursed with funds from their QSEHRA when they submit proof of eligible medical expenses. They can’t access the money otherwise, and the employer decides what expenses are eligible for reimbursement.
Some employers allow reimbursement for any expense that the IRS allows, while others will only reimburse employees for deductible, copay, and coinsurance costs associated with their group health plan. Funds from QSEHRAs can also be used to reimburse employees for some or all of the premiums they pay for their health insurance.
If you’re offering QSEHRA benefits, however, you can’t reimburse an employee more than:
- $5,850 of eligible expenses incurred in 2023 (or $487.50 per month) for self-only coverage, or
- $11,800 of eligible expenses incurred in 2022 (or $983.33 per month) for family coverage.
Within that maximum, you can vary the amount you reimburse each employee, but the difference can only be based on their ages and the number of people they’re covering (i.e., it’s okay to reimburse an employee with four family members more than you reimburse a single employee).
Employers can allow unused QSEHRA benefits to carry over from month to month or one year to the next without exceeding the dollar limit for the next plan year, but they aren’t required to do so. In addition, the rollover amount plus the total allowed for the current year can’t exceed the maximum limits set by the IRS for the current year.
Why would I offer an HRA or QSEHRA to my employees?
If you’re offering a group health insurance plan, you may already know that a higher deductible will result in lower monthly premiums. But your employees might not be thrilled with the idea of increasing their out-of-pocket costs—and that’s where the HRA comes in.
Say you currently have a group insurance policy with a $1,000 deductible, and you want to switch to a plan with a $3,500 deductible in order to reduce the monthly premiums. You can then set up an HRA for your employees and agree to reimburse them up to $2,500 per year for medical expenses that they have to pay out-of-pocket before meeting their deductibles.
This is a win-win for everyone.
Your group’s health insurance premiums will be lower with a higher deductible plan, and employees who do end up having to meet the higher deductible are no worse off than they would have been under the old plan because they’ll be able to seek reimbursement from the HRA for up to $2,500 worth of qualifying expenses.
For small businesses, QSEHRAs offer employers an alternative way to provide health benefits to employees without offering a group plan.
Can I offer an HRA or QSEHRA along with an HSA?
You can offer a premium-only QSEHRA, a limited-purpose HRA, a suspended HRA, a post-deductible HRA, or a retirement HRA, all of which will allow your employees the opportunity to contribute to an HSA as long as they have HDHP coverage. Learn more about how these options work.
What is an ICHRA?
With an Individual Coverage HRA (ICHRA), employees need to be enrolled in individual health insurance on or off an exchange or Medicare and not group health plan coverage to participate in this HRA. An ICHRA can also meet the Affordable Care Act (ACA) employer mandate to provide affordable health insurance if the employer has at least 50 full-time and full-time equivalent (FTE) employees. An employer can allow ICHRA amounts to roll over month to month or year to year.
Employers can offer an ICHRA or a traditional group health plan to different classes of employees, based on employment distinctions, which include but aren’t limited to full-time, part-time, and seasonal employees. (Note: One exception is that new employees can be offered an ICHRA within the same class of employees who are already participating in a traditional group health plan.)
The requirements for employers who offer an ICHRA and a traditional group health plan vary based on the minimum class size rules that govern those distinctions, and these requirements don’t apply if an employer only makes an ICHRA available to employees.
The minimum class size requirements are:
- 10 employees, if you employ less than 100 people
- 10 percent of the total number of employees, if you employ 100 to 200 people
- 20 employees, if you employ more than 200 people
There are also minimum class size considerations if some employees receive a traditional group plan and others have ICHRA, based on these distinctions:
- full-time vs. part-time status
- salaried vs. non-salaried status
- geographic location, if smaller than a state
Note: When any of the employment classes are combined, even if a traditional group plan isn’t offered, the minimum class size rule applies as well.
The ICHRA classes of employment include:
- Full-time employees
- Part-time employees
- Employees working in the same geographic location based on insurance
- Seasonal employees
- Employees that are part of a collective bargaining agreement
- Employees who have not satisfied a waiting period
- Non-resident aliens with no U.S.-based income
- Salaried workers
- Non-salaried workers (i.e., hourly workers)
- Temporary employees of staffing firms
- A group of employees associated with two or more of these classes
What is an EBHRA?
An Excepted Benefit HRA (EBHRA) is not a traditional group health plan or an essential part of one, though it is a type of group health plan on its own. It can’t be used to reimburse health insurance premiums (individual or group coverage or Medicare), but it can be used for medical expenses for premiums for dental and vision plans, since they are excepted benefits. Unused amounts can roll over year to year.
Employers must offer a traditional group health plan if they offer an EBHRA, though the employee doesn’t have to be enrolled in the health plan to participate in this HRA. An EBHRA can’t be offered with an ICHRA to the same class of employees. It has an employer contribution limit of $1,950 in 2023.
Compare different HRAs and small group health insurance to find the best option for your business
Use this handy table to choose the best health insurance for the employees of your small business.
| Small group health insurance | QSEHRA | ICHRA | GCHRA | EBHRA | |
|---|---|---|---|---|---|
| Eligibility | Businesses must have 2–50 full-time employees (some states allow small group up to 100 employees). | Businesses must have 1–49 full-time employees. | Businesses must have at least 1 employee who isn't an owner or spouse. | Only offered with a group health plan, regardless of company size. | Only offered with a group health plan, regardless of company size. |
| Cost to Employer | Variable. Requires minimum employer contribution, in most cases at least 50% of premiums. | Variable. Employer can choose how much to contribute, up to the maximum amount set by the IRS: 2024 max amounts:
2023 max amounts:
| Variable. Employer chooses how much to contribute. | Variable. Requires minimum employer contribution, in most cases at least 50% of premiums; for the HRA, employers choose how much to contribute. | Low. Employer chooses how much to contribute, up to the maximum amount set by the IRS: 2024 max amount: $2,100 2023 max amount: $1,950 |
| Scope of coverage | Can include medical, vision, and dental coverage. Both employees and their dependents can enroll, but enrollment may not be required. | Cannot be offered in conjunction with any group health plan, including vision and dental plans. QSEHRA must be available to all eligible employees, but employees may choose not to seek reimbursements. Depending on the QSEHRA administrator, employers may have the option to reimburse all eligible health expenses, or premiums only. | Cannot be offered in conjunction with any group health plan. Employees must be enrolled in individual health insurance on or off an exchange to participate in this HRA. Employers can offer an ICHRA or a traditional group health plan to different classes of employees, based on specific job-based criteria. When this happens, there are class minimum size requirements for the number of employees that should be offered ICHRAs. | Only offered with a group health insurance plan, and cannot be used to reimburse premiums. Used to reimburse out-of-pocket medical expenses associated with a high-deductible health plan. | Cannot be used to reimburse health insurance premiums, but it can be used for medical expenses for premiums for dental and vision plans. Employees can be reimbursed for medical expenses (including deductibles, copays, etc.) not covered by a primary health plan. Employers must offer a traditional group health plan if they offer an Excepted Benefit HRA, though the employee doesn’t have to be enrolled in the health plan to participate in the Excepted Benefit HRA. |
| Who pays and how much | The employer generally pays 50% or more of the employee premium; the employee covers the rest pre-tax. | Only the employer can make QSEHRA contributions. The employer decides how much money to set aside for each employee, up to the annual maximum set by the IRS. | Only the employer can make ICHRA contributions. The employer decides how much money to set aside for each employee. There are no maximum or minimum annual requirements; however, when determining minimum contributions, employers should calculate ICHRAaffordability, since it impacts whether or not an employee would participate in an ICHRA and the premium tax credits (PTC) they can or can't claim as a result if they get a plan through the health insurance marketplace. | The employer generally pays 50% or more of the employee premium for the health insurance; the employee covers the rest pre-tax. The employer decides how much money to contribute to the HRA, sets the deductible, and determines if the employees need to pay a portion of the reimbursable expenses. | Only the employer can make EBHRA contributions. The employer decides how much money to set aside for each employee, up to the annual maximum set by the IRS. |
| Tax benefits | Employer and employee contributions are free of payroll taxes. Employee contributions are free of income tax. Employer contributions are deductible as a business expense. | Employer contributions are free of payroll tax, and employees don’t pay income tax on contributions as long as employees are enrolled in minimum essential coverage (MEC). Employer contributions are deductible, as well. However, if employees purchase individual coverage, premiums are paid with after-tax dollars (unlike SGHI where premiums are paid pre-tax). If an employee receives a premium tax credit (PTC) for a Marketplace Exchange plan, the offering of a QSEHRA could affect the PTC. | Employer contributions are free of payroll tax, and employees don’t pay income tax on contributions as long as employees are enrolled in MEC. Employer contributions are deductible, as well. With individual coverage, employees pay premiums with after-tax dollars (unlike SGHI where premiums are paid pre-tax). By participating in an ICHRA, employees waive PTC. | Employer contributions are free of payroll tax, and employees don’t pay income tax on contributions as long as employees are enrolled in MEC. Employer contributions are deductible, as well. | Employer contributions up to the maximum amount are free of payroll tax, and employees don’t pay income tax on contributions. Employer contributions are deductible, as well. |
| Time cost to employers | High. Plan selection and plan renewal require employer oversight. Employers must also provide an open enrollment period each year so employees can make changes to their benefits. | Low. Employees find their own coverage either through the individual marketplace or their spouse’s group coverage. Employers select the reimbursement amounts, and a third-party administrator can handle the rest. | Low. Employees find their own coverage on or off an exchange. Employers select the reimbursement amounts, and a third-party administrator can handle the rest. | High. Plan selection and plan renewal require employer oversight. Employers must also provide an open enrollment period each year so employees can make changes to their health benefits. | High. Group plan selection and plan renewal require employer oversight. Employers must also provide an open enrollment period each year so employees can make changes to their benefits. |
| Ease for employees | High. Employees choose between plan options provided by their employer. | Low. Employees have to find the right plan that meets MEC requirements. | Low. Employees have to find their own health insurance plan. | High. Employees choose between plan options provided by their employer. | High. Employees can choose between plan options provided by their employer, and can participate in the EBHRA even if they don't choose the group health plan. |
| Spending accounts | OK:
| OK:
NOT OK:
| OK:
*This is only if the employee has individual insurance not purchased through an exchange, and the ICHRA needs to be reimbursing only premiums and not medical expenses, though employees can fund the HSA simultaneously. Otherwise, if employees want to use the ICHRA and HSA for premium and medical-expense reimbursements at the same time, the employee needs to be on a high-deductible health plan, the employer can't offer a group health plan to other employees, and the ICHRA needs to be set up in a way where additional conditions are met and restrictions apply. | OK:
| OK:
**But if medical expenses are reimbursed through the EBHRA, they can't also be reimbursed through a FSA or HSA. |
| Participation requirements | Generally at least 60% of your team must enroll, but this varies by state and carrier. | 0% (but all eligible employees must be offered a QSEHRA). | 0% if offering only ICHRA; if offering ICHRA and a group health plan to different employee classes, then minimum class sizes apply. | Generally at least 60% of your team must enroll in a small group health plan, but this varies by state and carrier. | 0% for the EBHRA, but generally at least 60% of your team must enroll in a small group health plan, though this varies by state and carrier. |
Why small businesses like HRAs
- Employers can provide guidelines and restrictions for how HRAs are used—as long as these guidelines are within the IRS’s rules.
- Small businesses can set a max amount to reimburse employees for eligible expenses, if the IRS hasn’t set a limit already for the HRA.
- The employer can determine whether unused funds can be rolled over from one year to the next.
- The employer can specify who can use the HRA (like the employee or employee’s family, including spouses and dependents).
- Small companies can control their costs with HRAs, and can offer them with other employer-sponsored benefits.
- As part of a competitive benefits package, HRAs are incentives small employers can provide to help hire employees and improve employee retention. According to the Society for Human Resource Management, using benefits to recruit and retain employees is an effective business strategy to improve company performance and job satisfaction. In a 2018 report, SHRM highlights that more than a third of organizations surveyed had increased benefits since the previous year, and among them, 51% had increased health benefits.
Why employees of small businesses like HRAs
- It’s an employer-funded benefit, excluded from gross income without federal or employment tax.
- HRA reimbursements are tax free for qualified medical and dental expenses.
- Under certain conditions, employees can use certain HRAs to pay for individual health insurance premiums and long-term care coverage.
An accountant and health insurance broker can help you determine what is the best range of benefits for your business to offer your employees.
Gusto offers full-service support to employers by helping to select and provide the right benefits package for your employees.
This article was originally published on January 19, 2019.