A health reimbursement account (HRA) is an account administered by an employer that reimburses employees for medical expenses, including health premiums and out-of-pocket costs. It is funded solely by the employer and is meant to be used in addition to employee-bought health insurance (be it through a spouse or purchased on one’s own). HRA can also refer to health reimbursement arrangement— a broader term that describes the way employees request and receive reimbursement.
In this article, we will walk through:
- What is an HRA & How Does It Work
- HRA vs Traditional Insurance
- The Rules Around Having an HRA
- Benefits of Having an HRA Available
If you’d rather read about traditional insurance plans, you can try our full guide to providing health insurance, where we recommend Gusto, a paryoll provider that also provides health benefits and many more HR solutions.
What is an HRA & How Does It Work
“An HRA is a complicated way of saying that an employer will give employees money for health insurance that they buy on their own in the marketplace,” says Rick Lundquist, CEO of Zane Benefits.
He continued to explain how an health reimbursement account is best for small business owners that want to give quality benefits at a controlled price. For example, a small business owner could set aside $250/month per employee for an HRA, regardless of how premiums or other medical costs fluctuate.
Rick also elaborated that an health reimbursement account is best for small businesses of under 50 employees and best for companies that think health insurance is too expensive, since it is not health insurance but instead a reimbursement account. If you have 50 or more employees, you will need to comply with the Affordable Care Act (ACA) and provide health insurance options for your employee; and HRA cannot help with that.
5 Main Things To Know About a Health Reimbursement Account
Here are the 5 main big pieces you need to know about an HRA:
1. It’s solely employer funded
There are no employee contributions whatsoever; as a small business owner, you will need to set aside the specific amount each year and have a solid cash flow aside from this money.
2. YOU (the employer) get to specify what employees can spend it on.
The employer gets to create the list of acceptable expenses for reimbursement. You can allow them to spend it on medical insurance premiums, out-of-pocket costs, prescription costs, and more.
3. Employees have to request REIMBURSEMENT.
Employees will need to document their qualified medical expenses by keeping receipts and submitting them via the process that is set by your provider. It’s probably a bit complicated for everyone at first, so make sure to have information readily available for your employees for their questions (maybe a poster in your break room, the phone number to your provider, and copies of the process for easy take home viewing).
4. An HRA is not the same as health insurance.
Health insurance is usually one of 6 kinds of plans, spanning HMO to PPO, and provided by classic insurance companies, insurance brokers, PEOs like Justworks, or HR benefits software like Gusto.
A health reimbursement account is provided by companies that specialize in providing them, like Zane Benefits, or can be provided by some of the large insurance companies directly. PEOs and HR software do not currently provide HRA formats.
5. An HRA, like an FSA, is employer-owned & employees cannot take it with them.
Since the employer is the only contributor to the plan, the HRA does not “go with” an employee is s/he is fired, quits, or changes jobs. The employer reserves the HRA funds for employees only.
Keeping with the clarity theme, let’s now compare the HRA to the HSA, which is a common confusion.
What is an HRA vs an HSA?
An HRA is a tax-advantaged account, funded solely by the employer. It is meant to support employees who purchased health insurance on their own (meaning, the business does NOT provide health insurance).
An HSA is also a tax-advantaged health savings account that can be used to pay for medical expenses and it is paired with a High Deductible Health Plan (HDHP), which is health insurance with a high deductible (over $1,300 for an individual, $2,600 for a family).
To be clear, an HSA and HDHP = health insurance. An HRA is NOT health insurance.
Summary Table of HRA vs HSA
|Who Funds It?||Employer Only||Employee Only or Both|
|What Can the Money Be Spent On?||Anything the employer includes on the list (usually premiums, any medical expenses, out of pocket costs, prescriptions)||Anything health related as determined by the provider (including vision, dental, and sometimes even cosmetic needs.) However, it cannot be used to pay premiums.|
|Is It Paired With Insurance?||Yes, but the employee gets the insurance from someone other than the employer (i.e. spouse, SHOP exchange)||Yes, with an HDHP. The HDHP should be provided by the employer and the HSA is a value-add.|
|Can The Employer Participate?||No.||Yes, if s/he is also on a HDHP.|
|What If My Employee Quits or Is Fired?||The employee can NOT take it with them.||The employee owns the HSA and will take it with them.|
HRA vs Traditional Insurance
So what does a health reimbursement account do compared to traditional health insurance? Basically, it is an employer-provided benefit to decrease your costs from either having to purchase health insurance on your own or to help supplement your medical expenses if you get health insurance from someone else (i.e. a spouse, your parents if you are under 26).
Let’s look at an example to clarify this.
Suzie is married to John and he works at a Fortune 100 company. His company pays for John’s health insurance, and he added Suzie onto his plan. His plan is a PPO and has a deductible of $1000 for each of them. Suzie’s employer providers her with an HRA of $4,000 per year. Suzie breaks her arm falling down the stairs. She submits her insurance to the hospital, and once the bills are final, she then submits receipts for reimbursement for what she had to pay out of pocket to her employer. Her employer will reimburse her for up to $4,000 of those expenses.
As an employer, the 3 biggest differences you will see from providing an HRA vs traditional insurance are:
1. The providers are different.
You might not be working with the big, well-known health insurance companies. HRAs are provided by small shops like Zane Benefits, as well as the insurance giants like Anthem Blue Cross.
2. You get to have a set cost that does not change.
Your HRA is not subject to market fluctuations in premium prices. You get to set aside an amount for each employee yearly and can, in general, keep it that amount.
3. You will need to make sure employees are well trained in their HRA.
You will need to make sure that employees know what documentation they will need and why for reimbursement to make sure the system works. Use your provider to help you train your employees on their HRA and have ample literature around in case employees have questions.
The Rules To Having an HRA
There are some complicated rules around having a health reimbursement account, which is why the only option, by law, is to have a licensed provider supply one for you. Some options include independent providers like Zane Benefits and insurance companies like Anthem Blue Cross and United Healthcare.
There are several compliance elements that include the IRS, HIPAA, ERISA, plan documents, emails, and notifications to employees. Your provider will do everything for you to ensure that you are compliant.
Also— remember— business owners can NOT participate in an HRA, just employees.
Benefits of Having An HRA Available
The benefits of having an health reimbursement account for a small business owner are many. Here are our top 7:
- Your employer contributions are 100% tax deductible and are not subject to federal, state, or social security taxes. Enough said.
- You give your employees freedom of choice in their healthcare planning (instead of forcing them to pick from the only plans you have available, they can go to market on their own and get reimbursed for it).
- It’s a controlled cost for you as the business owner. For everyone employee, you know what you will give each month/year and you can budget accordingly. Simple!
- It’s a useful benefit that every employee can use. Every employee will need health reimbursements be it for a regular prescription, premiums, dental visits, vision needs, or even having a baby. This is a usable and useful benefit no matter your age.
- You as the employer have control over what are qualified expenses. You can make it as vast or narrow as you want. It is a good idea to include expenses like copays, deductible bills, and prescriptions. Typically, most employers don’t place restrictions on medical related expenses but you could if you wanted to. You can even include COBRA payments for employees you have to let go of.
- An HRA can work across multiple states, which is a huge plus for small businesses who use full time resources in other states. This is a huge perk instead of forcing them to be 1099s or to not have any benefits.
- Any unused dollars may be rolled-over into the next year, if you want to allow for that (similar to an HSA). This then allows the employee to accumulate money for future medical needs, such as retirement healthcare expenses, which really can be a huge plus to keeping your employees happy.
Though many of these are employer-focused since that is our audience, remember how happy your employees will be too. To go from no insurance provided or to relying on a spouse or partner for everything… this will be a huge win for them and for you in keeping your employees happy, engaged, and excited to work for you.
Drawbacks of an HRA
Like all benefits out there, there are drawbacks to an health reimbursement account to consider. The top 3 drawbacks are:
- It is solely employer funded – You have to pay for this. You get a tax break, but in the end, you need the budget for it.
- Process of reimbursement – You will have to help facilitate the reimbursement process, so you will want to make sure that YOU understand the HRA and the commitment it requires from you as well. We recommend also having a number of places in the office where the reimbursement process is posted, handouts are available, and the provider’s email and phone number are posted for questions.
- Employees don’t always understand them – Explaining an HRA to employees can be time consuming… which is why you’ll want an ace provider who will be supportive to you and your employees, including a way to reach them online for the best convenience for employees about reimbursements.
The Bottom Line
Providing an health reimbursement account sounds complicated but it doesn’t have to be and it is a great option for a small business owner. Find a local or national trusted provider and see what it might look like for your small business, especially if you do not offer health insurance. It would mean a lot to your employees and help you attract new talent.
Remember to check out Gusto, which can provide health benefits, payroll, and more.