All 3 Health Care Reimbursement Arrangements (HRAs) Reshaping Small Business Health Insurance
Big changes to small business health insurance went into effect in January 2020: that’s a result of health reimbursement arrangements, or HRAs. HRAs are a bipartisan effort to alleviate healthcare costs by spreading healthy individuals across the market.
The easiest way to think about an HRA is that employees find a health plan that works best for them. Then, their employer reimburses premiums and qualified medical expenses. The result? Increased flexibility allows for more personalized plan choice for the employee, less risk management for the employer, and greater tax efficiency for all.
In a world filled with such an abundance of health insurance acronyms, it’s important to make the distinction between an HRA, an HSA (Health Savings Account), and an FSA (Flexible Spending Account).
Unlike an HSA or FSA, the HRA doesn’t require money to be put into an account; it simply reimburses for expenses along the way. The unused funds stay with the employer.
One HRA — called the Qualified Small Employer Health Reimbursement Arrangement — has been around since October 2016 when Congress passed the 21st Century Cures Act into law. But two more HRAs joined the party January 2020, bringing the proven tax-friendly benefits of HRAs to a wider footprint of businesses:
Let’s explore each of these HRAs individually. They all deserve a little time in the spotlight!
What’s an ICHRA?
An ICHRA is a new HRA effective January 1, 2020, that allows employers of any size to reimburse any amount per month for healthcare expenses incurred by employees on a tax-free basis. Addressing some of the fundamental limitations of QSEHRA, an ICHRA allows employers to scale benefits across 11 customizable classes of employees and allows employees to opt out of ICHRA if it’s more favorable to receive premium tax credits.
A few other ICHRA details you won’t want to miss:
- Employees must have a marketplace or Medicare plan to participate. While dependents on the insured individual’s family plan can benefit from ICHRA reimbursements, individuals covered through a spouse’s group plan, sharing ministries, or TRICARE are not eligible.
- A qualifying life event is triggered when an employer begins to offer an ICHRA, which means that employees will have 60 days to enroll in an ACA major medical plan instead of waiting until the annual Open Enrollment Period.
What’s an EBHRA?
The Excepted Benefit HRA (EBHRA) allows employers of any size to use pretax dollars to reimburse certain limited benefits.
TIP: Major medical premiums, coverage under a group plan, and Medicare Parts B or D premiums are not eligible. But the rules make exceptions that allow for payment of COBRA premiums, short-term premiums, and individual or group plans that consist solely of excepted benefits. “Excepted benefits” is insurance jargon to refer to insurance plans that are not primary health plans — like vision insurance, dental insurance, long-term care insurance, or nursing home care.
The EBHRA must be separate from the group plan offered by the employer. EBHRA benefits must be limited to $1800 per year. Also, an EBHRA cannot reimburse premiums for certain types of health insurance coverage. It must be available on the same terms to all similarly situated individuals – so older and younger workers alike must be eligible.
Unlike most HRAs, employees do not have to participate in a group plan to receive EBHRA reimbursements. However, employers must offer group health insurance in order to offer an EBHRA.
What’s a QSEHRA?
A QSEHRA allows small employers to set aside a fixed amount of money each month that employees can use to purchase individual health insurance or use on medical expenses, tax-free. This means employers get to offer benefits in a tax-efficient manner without the hassle or headache of administering a traditional group plan and employees can choose the plan they want.
To be eligible, a company must be under 50 full-time employees and not offer a traditional group plan. For employees to be eligible, they must have health insurance that meets Minimum Essential Coverage requirements and they must submit claims for reimbursement.
QSEHRA has maximum annual contribution rates for 2020 set at $5,250 for singles or $10,600 for families. The rates adjust yearly for inflation.
An exciting change for this HRA in 2020 is that, much like ICHRA, a special enrollment period for ACA coverage will be triggered once a QSEHRA is offered for the first time.
Think of QSEHRA as the predecessor to the next generation of HRAs — the HRA that paved the way.
What’s In Store for Enterprising Benefits Managers?
It’s going to take a little while for the market to realize the full potential of these new HRAs, but the Departments of Labor, Health and Human Services, and the Treasury are expanding new HRAs over the next 5 years that will benefit around 11 million employees.
These more recent “flavors” were designed by the departments of the Treasury, Labor, and Health & Human Services in response to an Executive Order to make HRAs more accessible. ICHRA and EBHRA are evidence of how regulatory rules are being used to fix some of the shortcomings of the Affordable Care Act while Congress continues to battle it out.
The momentum that HRAs have gained is the result of reform supported across two Presidential administrations. They are a huge win for business owners and employees.
But enough with the politics! We believe the new HRAs will reshape the employer-sponsored healthcare market with a more flexible financial model, similar to the widespread shift from pensions to 401(k)s.
With these new HRA products, all employers have a flexible way to “pitch in” to help employees with healthcare costs. Large employers will be able to provide benefits without having to manage their employees’ risk.