QUESTION

I’ve heard that instead of offering a group health plan, I can offer my employees a “Health Reimbursement Arrangement” (HRA). What are these and should I offer them?

Coverage for small employers | Small Employer Coverage
ANSWER

Small employers (with up to 50 full-time employees) can offer multiple kinds of HRAs, but three that are relatively new under federal law are:

  • An “individual coverage” HRA. Under this HRA, the employer funds an account to reimburse employees for the premiums for an Affordable Care Act-compliant individual health insurance policy and/or other qualified medical expenses, instead of offering a traditional group health plan.
  • An “excepted benefit” HRA. Under this HRA, the employer must still offer a traditional health plan. In addition to that plan, the employer may put funds in an HRA account (up to $1,800 in 2021) to help employees purchase vision, dental, COBRA, short-term, or other insurance products not subject to the Affordable Care Act’s full range of consumer protections. Excepted benefit HRAs may also be used to pay directly for health care services and for cost-sharing like deductibles and co-payments.
  • A “qualified small employer” HRA. The “QSEHRA” is available only to small employers and allows them to fund an HRA for their employees on a tax-free basis to reimburse premiums for health insurance and other qualified medical expenses. Your employees’ eligibility for premium tax credits through the marketplaces will be assessed differently, depending on whether they have an individual coverage HRA or a QSEHRA.

Individual Coverage HRAs

Employers may offer employees a tax advantaged HRA instead of a traditional group health plan. The HRA account may be used to reimburse employees for individual health insurance premiums. You can contribute as much as you want to the HRA. However, if the amount is small enough that your employees’ post-HRA premiums for the lowest cost Silver level plan available to them exceed 9.61 of their household income in 2022, they could qualify for premium tax credits through the Affordable Care Act marketplaces. If they do so, they must decline the HRA or face increased tax liability.

If you offer an HRA, it must be offered on the same terms to all employees within a given class, except that you can increase your contributions for older employees or those with dependents. You can make distinctions between different classes of employees, such as:

  • Full-time employees;
  • Part-time employees;
  • Employees working in the same geographic location;
  • Seasonal employees;
  • Employees who have not satisfied a waiting period;
  • Salaried workers;
  • Non-salaried workers.

For a full list of permissible classes of employees, see the IRS’ FAQs on New Coverage Options for Employers and Employees.

When you offer an Individual Coverage HRA, you must provide notice to eligible employees. The IRS has created a sample notice that you can use. You must also be able to substantiate that your employees and any dependents have enrolled in Affordable Care Act-compliant health insurance (or Medicare) while covered by the HRA.

However, many employees are likely to find the IRS sample notice confusing. Additionally, many companies are now using deceptive and aggressive marketing tactics to sell consumers insurance products that do not comply with the Affordable Care Act’s consumer protections. You should thus consider offering your employees the services of a reputable, qualified broker to advise them on choosing an optimal coverage option. You may contact your state department of insurance for the names of licensed brokers that serve small employers. You should also advise your employees against purchasing any health insurance products online or over the phone. (26 C.F.R. §54.9802-4; 26 C.F.R. § 1.36B-2; 86 FR 24140, May 5, 2021; IRS Rev. Proc. 2020-43)

Excepted Benefit HRA

You can offer your employees an excepted benefit HRA in addition to your traditional group health plan. This HRA is designed to help employees purchase insurance products that are “excepted” from most state and federal standards for health insurance. They are intended to supplement – and not replace – your small-group health plan. These can include vision or dental coverage, short-term plans, or certain indemnity products that help defray deductibles or copayments. Note that unlike employer-based coverage, many excepted benefit products can deny coverage to people with pre-existing conditions.

Your contributions to the excepted benefit HRA must be limited to $1,800 in 2021, and the HRA must be offered in conjunction with a traditional group health plan. The HRA cannot be used to reimburse premiums for individual health insurance coverage, and you must make it uniformly available to all similarly situated employees. If you decide to offer an excepted benefit HRA, you should retain the services of a reputable, qualified broker who can advise your employees about the financial risks and benefits of purchasing excepted benefit products. You may contact your state department of insurance for the names of licensed brokers that serve small employers. (26 C.F.R. §54.9831-1; IRS FAQs for New Coverage Options for Employers and Employees)

Qualified Small Employer HRAs (QSEHRA)

A qualified small employer health HRA (QSEHRA) allows you to fund a tax advantaged account for your employees to reimburse for a wide range of medical expenses, including health insurance premiums. In order to take advantage of a QSEHRA, your employees must enroll in health coverage that qualifies as minimum essential coverage. If you offer a QSEHRA, you cannot also offer a traditional group health plan. You must also fund the HRA without any contributions from the employee, subject to annual contributions limits (in 2021, $5,300 per year for self-only coverage and $10,700 for family coverage). Employees with a QSEHRA can apply for a marketplace plan, and if otherwise eligible they may receive premium tax credits if your contributions to the QSEHRA are small enough that marketplace coverage is not considered affordable. Note: this is not the case if they have an Individual Coverage HRA, see above. Before deciding to offer a QSEHRA, you should retain the services of a qualified tax advisor. You may contact your state department of insurance for the names of licensed brokers that serve small employers. (26 U.S.C. § 9831; 42 U.S.C § 36B(c)(4)).

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