What Is a Health Reimbursement Arrangement and Could It Work for Your Small Business?

Health coverage is usually the first benefit an employee asks about and the hardest one for a small business to fund. Some small employers skip a group plan because of rising premiums, participation minimums and yearly renewals. Others carry a group plan but cannot extend it to every part of their workforce.

A Health Reimbursement Arrangement (HRA) can help in either situation: You decide how much to put toward health costs, employees buy their own coverage and you reimburse them up to that amount. One type of HRA is designed for employers that offer no group plan at all, and another works with a group plan for employees it does not cover.

How an HRA Works

An HRA is not health insurance. It is an employer-funded benefit that reimburses employees for qualified medical expenses and, in some cases, individual health insurance premiums. The employer sets the reimbursement amount, employees pay for health coverage or expenses, and the employer reimburses them up to the established limit. Contributions to an HRA come from the business, not the employee.

Types of HRAs

Two common options for small businesses include:

1. Qualified Small Employer Health Reimbursement Arrangement—This is generally available to employers with fewer than 50 full-time equivalent employees that do not offer a group health plan. To receive reimbursements, employees typically must have individual coverage that qualifies as minimum essential coverage. This benefit is usually available only to W-2 employees, not contractors. Contribution limits are typically set by the IRS each year.
2. Individual Coverage Health Reimbursement Arrangement—This option is generally open to employers of any size, including those that offer a group plan to some employee classes. Participating employees typically must be enrolled in individual health insurance or Medicare. There is usually no cap on employer contributions.

Who Is Eligible for an HRA?

Eligibility depends on the type of HRA and how your business is set up. An HRA usually works best for businesses that:

• Find traditional group coverage too expensive or cannot meet participation requirements
• Employ remote or multistate workers who need plans available in their own areas
• Want a predictable, fixed benefits budget instead of annual premium increases
• Have a mix of full-time, part-time or seasonal staff and want to offer different levels of support by employee class
• Are growing and want a benefit that scales without renegotiating a group plan each year

Businesses that already offer a competitive group plan or have very few employees enrolled in individual coverage may see less value in an HRA.

Is an HRA Right for Your Business?

An HRA lets you offer health benefits on a budget you set, rather than one the insurance market sets for you. Tax rules and eligibility requirements vary, so review your options with a licensed professional before setting one up.

Contact Insurance Solutions USA to talk through which health benefit options fit your business.

This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information.