Health Reimbursement Arrangements (HRAs)

If your health insurance plan is offered by your employer, you may be aware of Health Savings Account (HSA), but Health Reimbursement Arrangements (HRAs) are innovative benefit frameworks that your employer should be looking at if not already subscribed to it. HRAs allow employers to provide health benefits in a more flexible, predictable, and cost-controlled way by giving employees tax-free funds to buy their own individual insurance plans. The continued rise of group health plan premiums and the improving choice and stability of the individual health insurance market are making HRAs an increasingly attractive alternative to traditional employer-sponsored health coverage.

Primer on Health Reimbursement Arrangements (HRAs)

Health Reimbursement Arrangements (HRAs) are employer-funded plans that reimburse employees for qualified medical expenses and, in some cases, insurance premiums. These arrangements offer a flexible way for employers to help offset healthcare costs, providing significant financial support for out-of-pocket healthcare expenses.

HRAs come in many forms, but two predominant forms are Individual Coverage HRAs (ICHRAs) and Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs). Both types allow employers to contribute to their employees' healthcare costs in a tax-advantaged manner, but they cater to different employer needs and employee situations.

How the Marketplace Helps in This Arrangement

The Health Insurance Marketplace, established under the Affordable Care Act (ACA), provides a platform where individuals can shop for and enroll in health insurance plans. For HRAs, the Marketplace plays a crucial role by offering a variety of individual health insurance plans that employees can choose from when using their HRA funds. This ensures that employees have access to a wide range of coverage options that best meet their needs.

Individual Coverage HRAs (ICHRAs)

Overview

ICHRAs were introduced in 2019 and became available starting January 1, 2020. They allow employers to reimburse employees for individual health insurance premiums and other qualifying medical expenses. With an ICHRA, the employer sets a monthly allowance of tax-free money that employees can use to purchase their own individual health insurance plan.

Market Analysis

• Adoption Rates: ICHRA adoption has seen significant growth. As of 2024, adoption increased by 29% from 2023, with a notable 84% growth among Applicable Large Employers (ALEs). This surge is driven by the rising costs of employer-sponsored group policies and the flexibility ICHRAs offer.
• Employer Benefits: ICHRAs provide employers with predictable healthcare costs and the ability to offer competitive benefits without managing a group health plan. This is particularly beneficial for small businesses struggling with rising group health insurance premiums.
• Employee Benefits: Employees benefit from the flexibility to choose a plan that fits their specific needs and the portability of their health insurance coverage if they change jobs.

Qualified Small Employer HRAs (QSEHRAs)

Overview

QSEHRAs were created by the 21st Century Cures Act and became available in 2017. They allow small employers (with fewer than 50 full-time employees) to reimburse employees for individual health insurance premiums and other qualifying medical expenses. Unlike ICHRAs, QSEHRAs have annual contribution limits set by the IRS.

Market Analysis

• Adoption Rates: QSEHRAs continue to be popular among small employers. In 2024, QSEHRA adoption saw steady growth, with small employers remaining the largest cohort of adopters. Approximately 84% of new adopters are small businesses offering health insurance for the first time.
• Employer Benefits: QSEHRAs enable small employers to provide health benefits without the complexity and cost of managing a group health plan. Employers can control their healthcare spending by setting defined contribution amounts.
• Employee Benefits: Employees receive tax-free reimbursements for their healthcare expenses, including premiums for individual health insurance plans. This arrangement provides flexibility and financial support for employees' healthcare needs.

Comparison with FFM's SHOP Marketplace

The Small Business Health Options Program (SHOP) was part of the ACA and allowed small businesses to purchase health insurance for their employees through the Federally-facilitated Marketplace (FFM) on HealthCare.gov. SHOP has evolved into more state managed by allowing them to offer vertical choice. While both SHOP and HRAs aim to help small businesses provide health benefits, there are key differences:

• Plan Choice: SHOP offered a selection of group health plans that employers could choose from, whereas HRAs allow employees to select any individual plan available in their area.
• Portability: HRA plans are portable, meaning employees can keep their health insurance if they change jobs. SHOP plans, like traditional group plans, typically ended when employment ended.
• Flexibility: HRAs provide more flexibility in terms of plan choice and customization for employees, while SHOP plans were more standardized.
• Administration: SHOP required employers to manage the group plan enrollment and administration, whereas HRAs shift much of the administrative burden to employees who select and manage their own plans.

Employer Awareness of HRAs

While HRAs present an exciting new benefits option, awareness among employers is still relatively low as the concept is fairly new. Larger employers and those working with benefits brokers and consultants are more likely to know about HRAs as an opportunity.

However, awareness is growing as more HRA administration platforms come to market and promote the concept. Brokers are also increasingly presenting HRAs to small business clients as an alternative to struggling group plans. Industry surveys show a steady increase in the number of employers familiar with and interested in HRAs each year since 2020.

Why Employees May Prefer HRAs

For employees, HRAs offer several potential advantages over traditional small group plans that make them increasingly attractive:

• Plan Choice: Employees can choose any plan in their area that fits their specific needs, network, and budget instead of being limited to the employer-chosen plan. This is especially appealing to younger and healthier employees who may prefer lower-premium high-deductible plans.
• Portability: With an HRA, employees own their health plan and can keep it if they change jobs. This contrasts with employer-sponsored plans that typically end with employment. Portability is valued by many workers.
• Tax Advantages: HRA allowances are tax-free for the employee, so they can pay for premiums and medical expenses with pre-tax dollars. This is similar to the tax treatment of group plans.
• Guaranteed Coverage: Employees with pre-existing conditions are guaranteed coverage with no exclusions or waiting periods in the individual market. This is not always the case with group plans.
• Potentially Lower Premiums: Depending on the employee's age and regional market, they may be able to find an individual plan with lower premiums than the group plan offered. This allows the HRA allowance to stretch further.

Of course, not all employees will prefer individual plans over group insurance. Some may find individual premiums too high based on their age or location, or may struggle to find a plan they like. However, for many workers, the choice and flexibility of an HRA is very appealing compared to a take-it-or-leave-it group plan.

Current HRA Adoption

Since HRAs first became available, adoption has been steady but relatively modest. However, interest and adoption accelerated in recent years as more employers struggled with group health plan renewals.

Industry surveys show that while overall adoption is still low, it is growing quickly. For example, a 2024 survey by the HRA Council found that overall adoption of HRAs is up nearly 30% over 2023, with an 83% increase in large employers choosing ICHRA. Small employers remain the largest cohort, with 84% of new adopters now able to offer health insurance to employees for the first time.

Adoption has been highest among small businesses with under 50 employees, as they have the hardest time offering competitive group plans. Adoption varies by industry but is most common in white-collar sectors like finance, technology, and professional services.

Geographically, adoption has been highest in areas with robust individual plan markets like California and the Northeast. It has been slower in rural areas with fewer individual plan choices.

Several states (like Oklahoma, Colorado, and Missouri) now offer HRA plans to their own employees, which is expected to drive broader awareness and adoption. Large insurance carriers are also increasingly promoting HRAs in their small group segments.

Continued growth in adoption is expected as more employers look to offer valued but sustainable health benefits by making fixed defined contributions to employee-chosen plans.

HRA Outlook & Trends

Industry analysts expect HRA adoption to rise significantly in the coming years as employers seek more predictable health benefit costs and employees demand more personalized benefits. Key trends driving future adoption include:

• Continued rise in group premiums makes HRAs increasingly attractive to employers.
• Growing employee demand for remote work requires more portable benefits.
• Need for greater health equity drives interest in more inclusive, personalized benefits.
• New HRA administration platforms make the model easier for employers to implement.
• Brokers are increasingly presenting HRAs as an alternative to unsustainable group plans.

One analysis projects that 8-10 million employees could be enrolled in HRAs by 2025, up from around 1 million in 2022. Small businesses are expected to drive most of this growth as they shift away from group plans.

The individual health insurance market is also evolving to serve more HRA participants. More states now offer "open choice" plans that allow employees to see any provider. Insurers are also rolling out HRA-specific plan designs in more areas.

At a policy level, some experts propose enhancing the value of HRAs by making larger employers exempt from the employer mandate if they offer an affordable HRA. Others suggest letting employees with affordable HRAs access premium subsidies, which is currently prohibited.

While still an emerging concept, HRAs are well-positioned for significant growth as a valued health benefit option that provides greater flexibility for employers and employees. With unsustainable group health plan costs leading to untenable cost-shifting onto employees and even plan droppage, HRAs provide a path to continue offering health benefits in a more predictable and sustainable way by leveraging the increasingly robust individual insurance market. Awareness and adoption are rising quickly and expected to accelerate in coming years, bringing more choice and personalization to employee health benefits.

Like always.. open questions to you all

Are you an employer grappling with offering cost effective insurance plans to your employees ?

Have you, as an employer, explored this area of HRAs ?

If you are an employee, and are frustrated with high premium and high deductible plans offered by your employer, would you want to talk to your employer about this opportunity before leaving for another employer who can offer better benefits ?

If you are already offering HRA benefit to your employees, how effective has it been ? Do your employees like this benefit ? Have you seen employee satisfaction ?