Health Reimbursement Arrangements (HRAs) – What They Are, How They Work

HRAs are a fairly complex topic, but if you’re being offered one at your job, it’s critical that you understand what it is, how it works, and how it’s different from the group major medical benefits you may be accustomed to.

We’ll try to break it down as clearly as possible in this blog post and discuss:

• What is an HRA
• What changed and why you may be offered one at your job in 2020 (and beyond)
• How the HRA rule change could impact the individual health insurance market

What Are HRAs and Why Am I Hearing About Them Now?

An HRA (health reimbursement arrangement) is an employer-funded plan traditionally used in conjunction with group health insurance to help employees pay for qualified medical expenses. HRAs are considered “group health plans” according to federal tax law, which allows employers to make pretax contributions to the funds.^[0]

You’re starting to hear more about HRAs now because the Trump administration finalized a rule in July 2019 that would allow integrating HRAs and other account-based group health plans with individual insurance coverage (either via the ACA Exchange or individual market) or Medicare beginning January 1, 2020.^[1]

The 2019 final rule on HRAs is a continuation of the Administration’s 2017 executive order to:^[2]

1. Expand HRAs
2. Make limited benefit short-term medical plans more available (duration limit repealed)
3. Expand association health plans (AHPs)

The rule created two new categories of HRAs: Excepted Benefit HRAs (EBHRA) and Individual Coverage HRAs (ICHRA), which we’ll cover in more detail below.

So, what does this all mean for you? Basically, it means that your employer could be offering you different ways to pay for health insurance and expenses this year, not just major medical coverage, despite the employer mandate for health insurance still being in effect.

Options for Employer-Sponsored Health Coverage Prior to 2020

The new rule represents a shift from how HRAs have traditionally been used.

Prior to the rule change, an employer could only offer an HRA to an employee that was also enrolled in an ACA-qualifying major medical group plan, although there were some exceptions for small businesses (under 50 employees) in the form of “qualified small employer HRAs” (QSEHRAs) and for retiree health plans.^[3]

Traditionally, as a group health plan, HRA funds could not be used to pay for individual health insurance premiums, they could only be used for qualified medical expenses associated with a group health plan.^[4]

It was fairly straightforward if you were employed at a larger company: you were offered group health benefits that you could either opt in or out of, with people generally opting in unless they were getting major medical benefits through their parent or spouse.

You may have then had to decide if you wanted to enroll in an HRA, health savings account (HSA) or flexible spending account (FSA) to help with qualifying out of pocket costs, especially if your group benefits came with a high deductible.

Now, you may have other options to consider…

Options for Employer-Sponsored Health Coverage in 2020 and Beyond

Beginning with 2020 health insurance open enrollment you may be faced with additional choices. And while the additional options may be welcome for some, it does introduce complexity that you need to understand to ensure that you’re getting enough coverage and benefits.

As of 2020, employers of any size can offer any of the following:

• Traditional group health insurance – an optional traditional HRA, FSA or HSA may also be offered
• Traditional group health insurance and an Excepted Benefit HRA
• An Individual Coverage HRA

Let’s take a closer look at each scenario and what it may mean for you if you choose an HRA instead of traditional group benefits if you’re given a choice.

Traditional Group Health Insurance

First, the one you’re probably familiar with. Traditional group health insurance is what most large employers offer employees to comply with the ACA’s employer mandate. Employer group health is minimum essential coverage and complies with ACA requirements.

You may also have the option to enroll in an HSA, FSA or traditional group HRA to help with a high deductible or medical expenses.

Traditional Group Health Insurance and an EBHRA

This is a new scenario as of 2020. If your employer offers you a traditional group health policy and an Excepted Benefit HRA, you can choose one of the following paths:

• Enroll only in the group major medical policy
• Enroll in the group major medical policy and the EBHRA
• Opt out of the health insurance and only enroll in the EBHRA

Let’s consider each one individually…

The first option is the traditional group health insurance scenario. It’s fairly straightforward and doesn’t require much further exploration here (if you have specific questions about your benefits speak with a representative at your company).

If you find yourself facing a high deductible, you may be underinsured and you may want to explore supplemental health insurance to get additional benefits. Or, you may want to enroll in the Excepted Benefit HRA in addition to your major medical policy.

Let’s talk about that option…

The second option, group policy + EBHRA may be attractive to you if:

• Your employer does not offer certain benefits like dental or vision insurance. You can use the HRA funds to help pay dental and vision premiums.
• You need supplemental benefits like dental, vision, and expense-based accident insurance to help with your group plan’s high deductible or other out of pocket costs.

In this scenario, the Excepted Benefit HRA helps you gain access to additional and/or excepted benefits to help increase your benefits. You’re still relying on your group major medical policy as your primary health insurance coverage, but you’re also either layering on more benefits with a supplemental policy or you’re getting dental or vision coverage.

The third option is opting out of major medical coverage and only enrolling in the Excepted Benefit HRA, which you can then use to purchase short term medical insurance.

This is where you need to be extremely careful to make sure you’re not leaving yourself financially exposed by opting for lower-premium coverage.

Let’s look at this more closely to better understand the tradeoffs.

Even with your employer kicking in, you may still be paying quite a bit each month in premium for your major medical coverage. The average annual individual group premium in 2018 was $6,896 (or $574 per month).^[5]

Comparatively, short term medical premiums are lower by as much as 54%.^[6] And with your employer kicking in up to $1,800 annually, your premium costs could be quite low. But that’s only part of the story.

There are reasons short term premiums are less expensive – some of the most important ones to keep in mind are that short term plans are underwritten, so if you have any serious health conditions you may not qualify; and they have more limitations and exceptions, including a pre-existing condition exclusion and limited coverage of mental health and maternity care.

Here’s a quick comparison of some of the features of major medical compared to short term health insurance.

Comparing Group Major Medical to Short Term Health Insurance

	Group Major Medical Insurance	Short-Term Health Insurance
Average annual deductible	$1,573[7]	$4,964**[8]
Guaranteed Issue
Available in Every State
Covers Prescription Drugs
Covers Preventive Care
Covers Pre-existing Conditions
Covers Pregnancy
No Annual or Lifetime Benefit Limits	*

*Applicable to Essential Health Benefits only
**Deductible is for 2018

You’re paying more in premium for major medical coverage because you have more protections, coverage and benefits, including a guaranteed-issue policy (no underwriting) and no policy termination or expiration.

If you do waive your group medical policy and opt to enroll in just the EBHRA, you cannot then use the funds to buy ACA-qualifying coverage, only to enroll in certain excepted benefit plans like dental, vision, and accident plans; and short term medical plans, which have benefits limits and many more coverage exclusions.^[9]

That could result in you not having access to health insurance coverage when you need it. So it’s critical to fully understand what you’re getting when you enroll in short term coverage. For most people with access to an employer-provided group health insurance policy, that is still the best option.

Need some more help comparing major medical and short term health insurance? Have a look at “What is Individual Major Medical Health Insurance and is it Right for You?” and “Is Short Term Medical Insurance Right for You?”

Just an Individual Coverage HRA

Finally, let’s look at what it means if you are offered an Individual Coverage HRA instead of ACA-qualifying major medical benefits.

Any employer of any size can now offer an ICHRA instead of an ACA-qualifying health plan, not just in conjunction with one.^[10]

In this scenario, your employer is giving you funds to go out and purchase your own individual major medical coverage either from the public health insurance exchange (healthcare.gov) or the private marketplace.

While this technically opens up many other plan options for you to consider, it could also lead to higher costs:^[11]

• If you are covered by an Individual Coverage HRA you are not eligible to receive ACA subsidies, which could result in a higher premium.
• You may face higher cost-sharing (deductible, coinsurance and copay) relative to a traditional group plan.
• More individual health insurance policies have narrow networks which can lead to higher out-of-pocket costs.

Whether or not an Individual Coverage HRA is a good value or a fair tradeoff for you will depend on how much money your employer contributes to the HRA and how expensive ACA plan premiums are in your area.

If your income is low enough that you qualify for an ACA premium tax credit, you can opt out of the Individual Coverage HRA offered by your employer in order to use the tax credit to buy individual health insurance on your own from the public ACA Exchange.^[12]

A Closer Look at the Two New HRAs: Excepted Benefit and Individual Coverage

As previously mentioned, the final rule that goes into effect January 1, 2020 created two new types of HRAs. If your employer is offering you one of them, it’s important to really understand what it is before you opt in. Let’s look at each one in more detail.

Excepted Benefit HRA (EBHRA)

Excepted Benefit HRA funds can be used to pay for excepted benefits like vision and dental, or limited benefit medical policies like short term medical insurance.

The category of Excepted Benefits is very broad, including vision, dental, accident, critical illness, hospital indemnity, short and long term disability, long-term care, and Medicare Supplement plans.^[13] Unfortunately, not all of these plans can be funded by an EBHRA. Only vision, dental, expense-based accident plans, long-term care plans and short term medical insurance can be funded by an EBHRA.

Excepted benefits plans are not subject to ACA requirements like traditional group health insurance and individual major medical insurance are. That means they aren’t guaranteed issue, don’t necessarily cover pre existing conditions or provide coverage for the essential health benefits, and may charge you more if you’re older or have an existing health condition.^[14]