Implementing An HRA: What An Employer Needs To Consider

While a competitive health benefits package can help you attract and retain talented employees, it can also be expensive. That’s why health reimbursement arrangements (HRAs) are increasing in popularity. These plans allow you to enhance your benefit offerings while saving you and your employees on the cost of health insurance. But before you offer one, there’s a lot to consider to make sure your plan is set up correctly, affordable, and embraced by employees.

For over 18 years, Complete Payroll Solutions has been administering pre-tax health plans like HRAs to give employees the chance to offset benefit costs with savings from pre-tax dollars. To help you understand what you need to consider when offering an HRA, in this article, we’ll discuss key factors when implementing a plan, including:

• Types of HRAs
• Qualified HRA Expenses
• What does an HRA cost?
• Steps to HRA Compliance

After reading this, you’ll know how to best set up your HRA to maximize the advantages to your employees and your business. 

Types of HRAs

There are generally four different types of HRAs. You can offer at least one type as long as you meet the participation guidelines.

• Integrated: These HRAs are integrated with group health plans and are only available to employees who are covered by your policy. Typically, an HRA is paired with a high deductible plan.
• Individual coverage HRA (ICHRA): An individual coverage HRA is an alternative that lets you provide non-taxed reimbursements to employees for qualified expenses. This is a way for you to fund your employee’s individual health coverage rather than providing group insurance.
• Excepted benefit: This HRA can be offered alongside a group health insurance plan and can reimburse employees for excepted benefits such as premiums on stand-alone dental and vision plans as well as eligible expenses related to those policies. For example, monthly vision insurance premiums plus the employee's co-pay for eyeglasses. An EBHRA can also reimburse employees for eligible medical expenses such as deductibles and co-pays.
• Qualified small employer HRA (QSEHRA): This type of HRA is only available if you have less than 50 employees and don’t offer a group  health insurance policy.

No matter what type of HRA you decide to offer, HRAs are funded solely by you. All contributions made by you are 100% tax deductible and 100% tax free to the employee.

Qualified Expenses

For employees to be reimbursed, their healthcare expenses need to be eligible. With an HRA, the IRS publishes a list of expenses that employees can be reimbursed for, but you can refine these further. That means you get to decide what you want the funds to be used for such as coinsurance. You’ll spell these out in your plan documents.

Once you implement an HRA, there are several steps involved to ensure coverage for qualified expenses.

1. To start, you’ll need to decide the maximum amount of money you’ll reimburse your employees for each expense. All employees in the same class must receive the same HRA contribution.
2. When your workers buy healthcare products or services, they’ll use their own money unless they’re enrolled in an integrated group coverage HRA.
3. Employees will then submit proof of their expenses and show that it’s eligible for reimbursement. If it is, the HRA administrator will approve the cost and reimburse the employee up to the amount of the allocated funds. If the employee uses up all the available funds, they’ll need to cover the expenses themselves.

So employees can take full advantage of the benefits of the HRA, make sure you clearly communicate how the plan works and what they need to do to get reimbursed. As we’ll discuss in a bit, a Summary Plan Description (SPD) should be provided to employees that states what the reimbursement limits and eligible expenses are as well as the reimbursement procedures.

What does an HRA cost?

While an HRA is designed to save you money on the cost of offering health benefits to your employees, they’ll still cost you something. Specifically, you’ll be responsible for certain administrative tasks that are required to keep you compliant with applicable laws and regulations. These include:

• Develop and distribute summary plan descriptions
• Manage enrollment and set up employee accounts
• Enable self-service through a desktop or a mobile application
• Provide ongoing funding management
• Process claims 
• Certify submitted expenses
• Handle reimbursements
• Manage employee activity like new hires and terminations
• Perform annual non-discrimination testing 

You can choose to handle these tasks in-house. But since an HRA can be technical and have complex compliance requirements, for example, you’ll need to ensure HIPAA compliance since you’ll see employees’ claims for medical procedures, many companies choose to outsource administration.

A third-party administrator usually charges a per employee per month cost. There may also be a set-up charge and a monthly minimum cost or base annual fee. For an HRA, you can expect to pay an administrator a set-up fee of anywhere between $150 and $1,500. You’ll also pay $450 to $750 per year for annual administration plus a per employee per month (PEPM) charge of $2 to $5. That’s in line with what we charge at Complete Payroll Solutions: $250 for set up with a $550 base annual fee and a PEPM of $2, making the cost for 10 participants for the year a total of $800 plus the one-time set-up fee.

Steps to Compliance

There are several laws that govern HRAs that you’ll need to be aware of. To comply and avoid costly fines, be sure to follow these 5 steps:

1. Create Plan Documents: You’ll need to formally establish your plan with the creation of legal plan documents. These will define things like eligibility, allowance and claims procedures. You’ll also need to create a Summary Plan Description (SPD), which we discussed earlier, that gives employees an easy way to understand the plan structure, rules and procedures.
2. Follow Privacy Rules: As we discussed earlier, HIPAA privacy rules apply to HRAs. If you’ll be handling reimbursements, you’ll need to make sure you have procedures in place to safeguard employees’ protected health information.
3. Keep Records: To avoid problems from an IRS audit, you’ll want to make sure you have proper documentation for all employee claims for reimbursement. These should be saved for seven years.
4. Beware the ACA: Since the ICHRA can satisfy the employer mandate requirements under the ACA, if you choose to offer this type of HRA, you’ll need to make sure you’re meeting the minimum value and affordability requirements.
5. Perform Annual Testing: HRAs are subject to non-discrimination testing so you’ll need to make sure you undergo testing each year to ensure your plan doesn’t favor highly compensated employees in terms of eligibility to participate or benefits provided.

Getting Started With an HRA

For some companies, it can be too expensive to offer traditional group health insurance. In these cases, an HRA can be an easy, cost-effective way to boost your benefit offerings. While you can design and administer an HRA on your own, you may choose to outsource these functions to a third-party administrator.

Complete Payroll Solutions may be the right option for your business if you:

• Have up to 100 employees
• Want assistance in plan design
• Prefer personalized service from one dedicated representative versus contacting a call center
• Are interested in additional support like open enrollment meetings for your employees

If our administration services sound like a good match for you, then take the next step and read our article on our pre-tax benefit offerings.