Health Reimbursement Arrangements (HRA) helped to usher in the era of defined contribution health plans when they were first recognized by the IRS in 2002. These arrangements permit the employer to contribute a specific dollar amount each year, which the employee can use to be reimbursed for substantiated, qualified medical expenses, including premiums for health coverage. HRAs receive extremely preferable tax treatment as the reimbursements are excludable from the employee’s taxable income and are not subject to payroll taxes, while the employer may still deduct the contributions.
Initially, the HRA was very popular with both small and midsized employers as it allowed the employer to control its healthcare costs through a fixed contribution without the administrative quagmire of getting involved in a group health insurance plan. Furthermore, HRAs also provided a valuable benefit for employees tantamount to an employer-provided healthcare plan. This worked very well until passage of the Affordable Care Act (ACA), which substantially curtailed an employer’s ability to provide HRAs to active employees, due to the restrictions the ACA placed on employer-provided healthcare plans. However, recent regulations, effective in 2020, have revitalized the use of the HRA by expanding its utility for small and midsized employers.
The expansion now includes the Individual Coverage HRA (ICHRA) and the Excepted Benefit HRA (EBHRA). In general, an employer cannot sponsor both types of HRAs unless they distinguish HRA coverage based upon employee classifications. This article will focus on the benefits of offering both types of HRA as it relates both to the employer and the employee.
The ICHRA may be offered by an employer of any size to help employees pay for individual health insurance coverage that the employee obtains through an Exchange or outside of an Exchange, including Medicare. Importantly, an employee utilizing an ICHRA cannot have an offer or choice of coverage under a traditional group health plan. Unlike a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), an employer may contribute any amount to an ICHRA. Furthermore, the employer may vary the contribution based on family size, age, or classification.
Importantly, employees that participate in an ICHRA cannot claim the premium tax credit (PTC). Thus, the employees must be offered the option to opt out of HRA coverage on an annual basis. With the introduction of this opt-out provision, the employee can choose to do what is best for their personal tax situation – participate in the ICHRA or purchase their own health insurance and claim the PTC. While the QSEHRA does not have the same design flexibility as the ICHRA, it does not preclude an employee from taking advantage of the PTC while receiving premium reimbursements. In addition, most small employers find the reimbursement limit -- $5,150 for individual coverage and $10,450 for family coverage in the QSEHRA -- to be quite adequate. Thus, for employers already utilizing a QSEHRA or those who are considering offering either a ICHRA or a QSEHRA, a careful review of the advantages and disadvantages of both plan types is recommended.
For small employers (those with 50 or fewer employees), however, the ICHRA can provide a meaningful alternative to providing a traditional group health plan for employees. While guidance is expected for large employers as to whether the ICHRA will allow them to comply with the shared responsibility requirements, the ICHRA can still be used to attract and retain part-time or seasonal employees who do not otherwise meet the participation requirements for the employer’s group health plan.
Another HRA expansion is the EBHRA. The EBHRA can be offered by an employer in addition to a traditional group health plan. It allows the employer to offer a benefit to employees that choose not to participate in the group health plan or are otherwise not eligible. The benefit is limited to $1,800 (indexed in future years) on an annual basis and any unused benefits may be carried forward to the next plan year. An EBHRA may not reimburse premiums for individual health insurance coverage, coverage under a group health plan, or Medicare.
If you wish to further explore these HRA alternatives or planned help with drafting or administering your plan, please contact your P&N advisor.