Sometimes, the escalating cost of group health insurance plans leaves some employers feeling like they have to settle for reasonably priced but less comprehensive coverage. However, the good news is that employers can supplement that coverage with a tax-favored health reimbursement arrangements (HRAs). This article focuses on two types: excepted benefit HRAs (EBHRAs) and integrated HRAs, which are sometimes referred to as group coverage HRAs (GCHRAs). These can help employers better cover their employees’ health care needs while providing employers some flexibility on cost.
EBHRAs: The New Kid on the HRA Block
Federal rules allowed employers to offer EBHRAs starting on Jan. 1, 2020. These HRAs generally allow for higher annual employer contributions and can permit rollover of higher amounts of unused funds at year-end. For this reason, an EBHRA may be a more appealing offering than some other HRAs. There are additional limitations, though, which employers need to be cognizant about in offering an EBHRA.
What are the maximum contribution rates?
The maximum permissible contribution for EBHRAs is adjusted annually for inflation. For 2021 and 2022, employers may contribute up to $1,800 per year to an EBHRA. The IRS doesn’t treat contributions as employee income, so, like all HRAs, EBHRAs allow employees to be reimbursed tax-free for qualified medical expenses.
All EBHRAs run according to a 12-month plan year set by the employer.
What are the requirements?
The rules require that an EBHRA:
- Is not an integral part of the group health plan.
- Does not provide reimbursement for premiums for certain health insurance coverage
- Be made available under a uniform basis to all “similarly situated employees.”
- is subject to COBRA if it provides an annual benefit of more than $500
- does not reimburse premiums for health insurance (an exception applies for COBRA or other coverage-continuation premiums) or Medicare
- requires claims submission and expense substantiation.
What is eligible for reimbursement in an EBHRA?
The name “excepted benefits HRA” can cause some confusion with another type of HRA that reimburses only so-called “excepted benefits.” Excepted benefits are those types of health coverage—like dental, vision, and, generally, short-term medical insurance—that are exempt from certain requirements under the Affordable Care Act.
Some HRAs can reimburse only for such benefits. In contrast, EBHRAs can reimburse employees for both excepted benefits, and other qualifying out-of-pocket expenses. Other eligible items include:
- Limited scope vision and dental insurance
- COBRA continuation
- Cost sharing of co-pays, deductibles, and other eligible medical expenses
- Short-term limited duration insurance premiums
- Long-term care coverage (nursing home care, home health care, community-based care, etc.)
While an EBHRA generally can cover any expense eligible for the federal income tax deduction for medical and dental expenses, employers can pick and choose which of those expenses they want to cover. Employees should check the plan documents to determine whether an expense is indeed covered.
Unlike other types of HRAs, such as a QSEHRA, EBHRAs cannot reimburse employees for premiums that are not considered an excepted benefit. These include premiums paid for individual health insurance, group health plans (other than COBRA), or Medicare part A, B, C or D. Only premiums for excepted benefits like limited scope dental and vision plans are covered. This exclusion can benefit employees, though. That’s because they remain eligible for premium tax credits (PTCs) that can subsidize their purchase of individual health insurance through a health insurance exchange or marketplace.
Which type of employers can provide an EBHRA?
Employers of any size can provide an EBHRA, but the arrangement must be offered in conjunction with an employer sponsored group health plan that provides minimum essential coverage (MEC). Employees do not have to enroll in the employer sponsored group health plan to participate in the HRA, though. This is great news for employees who might not have been able to afford the group health plan premiums. These employees can purchase a short-term plan instead and use their EBHRA allowance to reimburse the premium. Employers must obtain waivers of coverage for every employee who enrolls in the EBHRA but not the group health plan.
Who do employers have to offer the EBHRA to?
Employers must make EBHRAs available on a uniform basis to all “similarly situated individuals.” That means an employer can offer an EBHRA to different employee classes, but only if the classes are based on a bona fide employment-based classification. Examples of employment-based classifications include:
- Full-time versus part-time
- Different geographic locations
- Union membership
- Date of hire
- Length of service
- Different jobs, and
- Current versus former employee status.
A classification based on any health factor generally isn’t permissible.
What happens to unused funds?
If unused funds remain at the end of the plan year, EBHRAs can allow the funds to be rolled over, without reducing the amount of the following year’s contribution. Employers can also cap the amount that can be rolled over and/or restrict how employees can use rolled-over amounts. When a rollover is allowed, the amount does not count toward the annual limit for the new plan year.
Or they can simply prohibit rollovers and hold onto the unused amounts. All types of HRAs are administered by the employer and are technically employer accounts; they do not belong to the employee (unlike an HSA).
Can employees have both an EBHRA and an HSA or an ICHRA?
Yes, employees may contribute to both an HSA and an EBHRA. However, they need to make sure that their health coverage is compatible with the HSA in order to participate and that reimbursements for the EBHRA do not impact their HSA eligibility.
Note, too, that an EBHRA cannot be offered with an individual coverage HRA (ICHRA) to the same class of employees. This is because an ICHRA may not be offered to any class of employees that is offered a group health plan.
The Integrated HRA (aka GCHRA) option
Also known as integrated HRAs, GCHRAs are another alternative for employers of any size. They offer a tax-free reimbursement method for employers who want greater control over their health benefits costs, as long as the employees have eligible expenses. Unlike EBHRAs, though, employees must be enrolled in the employer’s group health plan to participate. Employers with GCHRAs must provide a group coverage plan that meets MEC requirements. Usually, employers with GCHRA provide high-deductible health plans (HDHP) which tend to carry lower price tags in exchange for less coverage.
Also in contrast to EBHRAs, GCHRAs come with no limit on employer contributions. This means that through using a GCHRA, employers can set their own reimbursement allowance for employees to use each month toward out-of-pocket expenses. Employers typically set a maximum monthly reimbursement allowance, with untapped funds rolled over month to month.
The arrangements are intended to help pay for costs not covered by the group plan. This means that employees cannot request reimbursement for insurance premiums. Instead, employees can use these funds toward their deductibles, coinsurance, copayments, and approved medical expenses but not their employer-provided group insurance premiums.
Employers can establish their own rules regarding minimum deductibles, cost sharing, explanation of benefits, and the expenses the GCHRA will reimburse. For example, they can require employees to pay deductibles, coinsurance, and copays (separate from those required by the group plan) before qualifying for reimbursement. These rules can help employers take greater charge of controlling cost while allowing their employees to enjoy the affordable premium of an HDHP when paired with tax-free reimbursements through a GCHRA.
Like EBHRAs, employers can make different contributions to different employee classes, and unused funds can be rolled over annually if desired.
EBHRA and GCHRA at a glance
| ## | EBHRA | GCHRA |
|---|---|---|
| Contribution amount | Employer’s choice, up to the annual limit. | Employer’s choice, with no limit. |
| Eligible businesses | All employers that offer a group health plan. | All employers that offer a group health plan. |
| Eligible employees | All employees offered group health plan coverage can participate. | All employees enrolled in the employer’s group health insurance plan can participate |
| Reimbursable expenses | Excepted benefits and eligible out-of-pocket expenses, as established by the employer. Excluded: premiums for individual health insurance, group health plans, or Medicare. | Eligible out-of-pocket expenses, as established by the employer. Excluded: health insurance premiums. |
| Tax effects | Reimbursements are tax-free for the employee and deductible for the employer. Employees who decline enrollment in the group health plan may qualify for PTCs but could be limited by the offering. | Reimbursements are tax-free for the employee and deductible for the employer. Employees must be enrolled in the group health plan, so PTCs are not generally available. |
