Deciding between group coverage & an HRA?

Wondering if traditional group coverage—like a plan offered through the Small Business Health Options Program (SHOP)—or a Health Reimbursement Arrangement (HRA) is right for your small business? Understanding eligibility requirements, coverage options, and costs can help you decide which option fits the needs of your small business and employees.

The difference between certain types of HRAs and traditional group coverage

HRAs for small employersIndividual coverage HRAs for employers of all sizesQualified small group plans, including SHOP

Overview

Known as a QSEHRA, this is for small employers to reimburse employees' qualifying medical expenses, like premiums for individual coverage or other expenses on a tax-free basis.

Known as an individual coverage HRA, this is for employers of any size to reimburse employees' qualifying medical expenses, like premiums for individual coverage or Medicare on a tax-free basis.

A group health insurance plan offered by an insurance company for eligible small employers.

Reimbursement model

Defined contribution—employers select how much money to contribute to employees, up to the allowed annual 2020 limit of $5,250 for individuals and $10,600 for households (increases annually for inflation).

Defined contribution—employers select how much money to contribute to employees.

Defined benefit—employers offer a plan, and in some cases are able to offer a selection of plans to their employees.

Eligible businesses

Generally, small employers with fewer than 50 employees (other than certain owners or their spouses) who don't offer other group health plan coverage.

Employers of any size with at least one employee (other than certain owners or their spouses).

Generally, small employers with 1-50 employees (other than certain owners or their spouses) may be eligible for SHOP coverage.

Coverage

Employees can generally choose how they use a QSEHRA as long as they use it for qualifying health care expenses, and they also have qualifying health coverage, like a plan from the Individual Marketplace.

Employees can generally choose how they use an individual coverage HRA as long as they use it for qualifying health care expenses, and have individual health insurance coverage, like a plan from the Individual Marketplace.

Employees have a plan or selection of plans to choose from that offer minimum essential coverage, based on what the employer offers.

Enrollment

Employers can provide a QSEHRA at any time of the year, but must give written notice to their employees 90 days in advance. Employees with a newly provided QSEHRA, or who newly gain access to an existing QSEHRA (like newly hired employees) may be eligible for a Special Enrollment Period in the Marketplace.

Employers can offer an individual coverage HRA at any time of the year, but must generally give written notice to their employees 90 days prior to the start of the individual coverage HRA plan year. Employees with a new individual coverage HRA offer will be eligible for a Special Enrollment Period in the Marketplace.

Small businesses generally can enroll any time of the year.

Employer contributions

Small employers can decide what they'll contribute to their employees' health care costs, up to the annual maximum.

Employers can decide what they contribute with no annual maximum.

There's no contribution requirement for SHOP coverage, though to be eligible for the Small Business Health Care Tax Credit, employers must contribute at least 50% of the cost of premiums for all full-time employees who enroll in SHOP coverage.

Tax Information

QSEHRA reimbursements aren't taxed to the employee. If the QSEHRA is affordable for an employee, the employee and any covered dependents aren’t allowed a premium tax credit for the employee's Marketplace coverage. If the QSEHRA is unaffordable, the employee must offset any premium tax credit by the amount of the QSEHRA.

Individual coverage HRA reimbursements aren't taxed to the employee. If an employee accepts the individual coverage HRA offer, no premium tax credit is allowed for the employee's Marketplace coverage. If the individual coverage HRA offer is considered affordable for an employee, the employee isn't allowed a premium tax credit for the employee's Marketplace coverage. Employees who decline (“opt out” of) an unaffordable individual coverage HRA, may qualify for a premium tax credit, if they are otherwise eligible.

Group health plan contributions are generally not taxed to the employee. If a qualifying employer offers SHOP coverage, the employer may be eligible for the Small Business Health Care Tax Credit.

Learn more

Learn more about QSEHRAs.

Learn more about individual coverage HRAs.

Learn more about SHOP.

What's an excepted benefit HRA?

If you offer group coverage, you may be able to help reimburse your employees for certain health benefits up to an annual maximum of $1,800 in 2020 (adjusted annually for inflation), like vision or dental coverage, coinsurance and copayments for individual coverage, short-term health insurance, or other health care costs. This type of HRA isn’t allowed to reimburse premiums for individual coverage, traditional group health plans (other than COBRA or other continuation coverage), or Medicare. See frequently asked questions about HRAs for individual coverage and excepted benefits (PDF, 408 KB).

Employees: Understanding HRAs