Certain types of health reimbursement arrangements, commonly known as HRAs, provide an alternative benefit for small businesses to offer their employees. Tax-advantaged, HRAs allow employees to be reimbursed for qualified medical expenses, which can include health insurance premiums, medication, out-of-pocket expenses, or dental or vision care.
Any employer of any size can offer an individual coverage health reimbursement arrangement (ICHRA) as an alternative to traditional group health insurance. However, qualified small employer health reimbursement arrangements (QSEHRAs) are for businesses with fewer than 50 full-time employees. It allows them to offer tax-free reimbursements for individual health insurance premiums with certain parameters around who is eligible and the maximum contribution for individuals and families.
Recently, Courtney Warren, Vice President of Strategy and Business Development for ADP, talked to HR Exchange Network about HRAs. Warren is licensed in employee benefits, certified in Individual Coverage Health Reimbursement Arrangement (ICHRA), and led service operations for one of ADP’s Professional Employer Organization (PEO) markets.
HRAs for Small Businesses
HREN: How do HRAs provide a competitive advantage to small businesses?
CW: HRAs are different from health reimbursement accounts. HRAs are special rules established in 2017 and then again in 2020. They allow employers to provide a fixed, pre-tax amount of money each month that employees can request reimbursement for things like health insurance premiums and qualified medical expenses.
ICHRAs and QSEHRA HRAs have features that are somewhat appealing for employers compared to a traditional group health plan. ICHRA is a reimbursement model that is sometimes referred to as a defined contribution. It gives employers a lot of flexibility to customize their reimbursement amounts based on various employee classes. And there's no limit to the amount of the reimbursement they could choose to provide. It does work for businesses of any size, and it's Affordable Care Act (ACA) compliant as long as the reimbursement amount meets the affordability tests under ACA.
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QSEHRA is only available to employers that have fewer than 50 employees. There are reimbursement limits to QSEHRA. But, unlike an ICHRA, the reimbursements of a QSEHRA can actually be used for employees who are on their spouse’s plans or if they're participating in a minimum essential coverage plan, or sharing ministry type of an arrangement that can be used in those situations as well.
Before these options, the Affordable Care Act really prohibited employers from reimbursing employees for getting individual coverage in the open market. Offering health insurance benefits to employees, as a part of the total compensation package, was one of the greatest competitive advantages that large employers have had over small businesses. When it comes to recruiting and retaining employees, the cost of group health insurance was prohibitive for small businesses.
But that wasn't actually the only barrier that we've seen small businesses face. Often, they didn’t meet the participation requirements that group health insurance plans and carriers have. So, even if they could afford to offer coverage, if they only had a couple of people who wanted to take advantage of it, they would not qualify. So, these two types of HRAs really level the playing field when it comes to small businesses competing for talent, which is great.
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Pros and Cons of HRAs
HREN: What are some of the drawbacks? Is there any way around these cons? If so, what are they?
CW: With any health insurance strategy, there are pros and cons, and every employer situation is unique. First and foremost, it's always important to consult a licensed benefit advisor when it comes to evaluating various options for your business. But specifically, when it comes to HRAs, one of the potential disadvantages can be that, depending on the plan and the arrangement, there can be contribution limits that employers must withhold to.
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Depending on the situation, it could actually help an employer have more flexibility to offer a broader range of of reimbursement options than they might be able to if they were offering a traditional group health plan because those typically tend to be one size fits all. There can be some carrier network challenges and provider option limitations depending on the individual carrier markets, state by state, in various geographical regions. However, we're seeing a lot more carriers that once had never really played a role in the individual insurance space start to enter or reenter those markets.
In many cases, individual policies are becoming more affordable, and providing better coverage in some areas than the lowest-cost, employee-only policy that's available on some group health plans. Again, this needs to be evaluated on a case-by-case basis by a licensed advisor. I would recommend somebody who can help assess an HRA network and provide a side-by-side comparison of what individual coverages would be in a certain geography compared to group health offerings.
HRAs for Recruiting and Retention
HREN: We've talked a little bit about both the drawbacks and benefits for the employer. But what about when it comes to the employees?
CW: If an employer is offering an ICHRA as a reimbursement to their employees and that reimbursement is considered affordable under the ACA rules, an employee is not going to be eligible for a premium tax credit. Before evaluating whether to offer a group health plan or an HRA, that's something else that an employer needs to factor in. Make sure that you're not inadvertently trying to do something good by offering employees this reimbursement with the unintended consequence of, maybe, knocking them out of eligibility for a premium tax credit that would be more advantageous for them.
HREN: How do HRAs impact recruiting and retention?
CW: According to the ADP Research Institute Report we [released] back in February of 2023, finding qualified talent still remains the number one challenge facing small businesses, and offering health insurance still is the most important factor for attracting new employees.
HRAs are now making it possible for small businesses to offer health insurance and compete for that talent. Previously, many small businesses could not provide group health plans to their employees. And now they really can establish that tax-free reimbursement in a model that fits, their budget and the demographic of talent they are trying to attract.
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Best Practices for HR
HREN: What are some best practices for HR professionals considering or offering HRAs?
CW: Offering HRAs as an alternative to traditional group health plans can be a valuable benefit for employees. But it can really help an employer maintain benefits coverage in in times, when health insurance premiums continue to increase. We talk to clients of ours, who are really weighing the decision of whether to continue to offer health insurance because they're struggling to keep up with the premium increases.
For HR, it's important, as with any offering related to insurance or incentives to make sure that you're ensuring compliance and fairness. Also, employees must really understand what is being offered.
Consulting with an attorney and benefits expert is always important to ensure that they're successful in evaluating whether it makes sense to start an HRA program. Comparing the options of a group health plan and an HRA is important to make sure that you're making an informed decision.
Whether you're offering a health insurance plan today or not, definitely speak to your licensed broker. Discuss the options. Do a plan comparison, and see what's going on in your markets. Compare the individual coverage and your markets to make sure that it's a good environment for you and your employees. Also, consider the wages and demographics of your employees to make sure that you're not inadvertently taking away a premium tax credit that's more advantageous for some folks.
Secondly, ensuring that the HRA is compliant with all the legal requirements, including the ACA, is a priority. Also, any state-specific regulations are always critical. Partnering with a third party administrator for HRAs can really help alleviate that pressure to stay up-to-date with all of the regulatory compliance aspects of an HRA. And there are some some great partners who we work with regarding that third party administration.
Third, have clear communication and education resources to help employees understand which policies might be the right fit for them. Again, third party administrators can really be great resources for that.
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Finally, with anything in HR, when changes are occurring or you're rolling out something new, investing in employees is always critical to establishing a great feedback mechanism. This way employees can feel their voices are heard, they can ask questions, and they can suggest improvements. I think those are winning combinations.
HREN: Is there anything else you think that our readers in our audience should know about?
CW: It's an exciting time for small businesses and their ability to compete for talent. HRAs are really making it possible for every small business owner who ever wanted to offer health insurance to their employees to actually have that option. They can serve as a fantastic tool to help attract and retain employees. But the key to the success is thoughtful implementation, effective communication, and alignment with employees' needs and preferences.
Employers should carefully consider their workforce, industry, geography, and goals for deciding what incentives to offer and how much to contribute.
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