Individual coverage Health Reimbursement Arrangements (HRAs)

The individual coverage Health Reimbursement Arrangement (HRA) is a specific account-based health plan. It allows employers the ability to better control costs by providing defined non-taxed reimbursements to employees for qualified health insurance costs, like monthly premiums for individual market plans purchased through the Marketplace or private insurance companies. Employees have the flexibility to pick the individual health insurance coverage that is right for them and their families. Then you, the employer, reimburse the costs.

Note: An individual coverage HRA isn’t a traditional group health plan. For small businesses interested in offering group coverage, learn more about SHOP plans. Enrolling in SHOP coverage is generally the only way to qualify for the Small Business Health Care Tax Credit, which can save eligible employers up to 50% of their employer contribution for 2 consecutive years.

Can I offer an individual coverage HRA?

Generally, employers of any size can offer an individual coverage HRA, as long as they have one employee who isn’t a self-employed owner or the spouse of a self-employed owner. HRAs are only for employees, not self-employed individuals.

How much can I contribute to my employees’ costs?

You have the flexibility to decide how much you contribute toward your employees’ individual health insurance coverage. There are no annual minimum or maximum contribution requirements for an individual coverage HRA.

Depending on how much you offer and the affordability of your offer, the individual coverage HRA offer could impact employees’ eligibility for premium tax credits. An individual coverage HRA is considered affordable for an employee if the amount of the premium the employee would pay (after the employer’s reimbursement) for the lowest cost self-only Silver plan offered on the Marketplace is less than 9.78% of the employee’s household income for 2020 plans.

  • If your offer is affordable: The employee won’t be eligible for the premium tax credit for the employee’s Marketplace coverage or the coverage of other family members who would be covered by the individual coverage HRA.
  • If your offer is not affordable: The employee must opt out of the individual coverage HRA to claim the premium tax credit, if otherwise eligible, for the Marketplace coverage of the employee and family members with an individual coverage HRA offer. The employee cannot combine the individual coverage HRA with premium tax credits.

You may also offer an individual coverage HRA with a cafeteria plan, which allows an employee to use pre-tax dollars to pay for the premium amount that is not covered by your reimbursement. If you do this, the employee must purchase individual health insurance coverage outside of the Marketplace.

Which employees are eligible for my individual coverage HRA offer?

You can offer an individual coverage HRA to any eligible employee, or you can offer it only to certain types of your employees. The types — or classes — of employees can be determined by certain job-based criteria, like:

  • Full-time, part-time, or seasonal status
  • Employees covered by a collective bargaining agreement
  • Salaried or non-salaried (like hourly workers) employees
  • Employees who have not satisfied a waiting period
  • Non-resident aliens with no US-based income
  • Employee work locations
  • Any combination of two or more employee types above

The individual coverage HRA rules specify the classes. Employers cannot make up their own classes. Find a full list of available classes. The reimbursement amount you offer can also vary within each employee class based on age (not to exceed a 3:1 ratio) or number of dependents, and you can set a waiting period for new employees. There is also a special rule for new hires. Otherwise, you must offer the individual coverage HRA on the same terms to all employees in a class.

Can I offer an individual coverage HRA with traditional group coverage?

You can offer certain types of employees a traditional group health plan and other types of employees an individual coverage HRA. But you can’t offer the same type of employees a choice between a traditional group health plan and an individual coverage HRA. For example, you could offer full-time employees a traditional group health plan and part-time employees an individual coverage HRA.

You’ll also need to be aware of certain requirements if you offer an individual coverage HRA to one type of employee and traditional group health plan coverage to another type of employee. If you offer an individual coverage HRA only to certain employees, in some cases there are size requirements for certain classes of employees that receive an individual coverage HRA offer:

Size of employer Class size minimum

Fewer than 100 employees

10

100–200 employees

10% of the total number of employees

200+ employees

20

If you do not offer a traditional group health plan to any of your employees, these class size minimums don’t apply.

How to start an individual coverage HRA

You can set up an individual coverage HRA at any time. You’ll just need to provide a written notice to your employees as soon as they’re eligible to participate, and 90 days before the beginning of each plan year. Employees must be offered the chance to opt out of the individual coverage HRA before the plan year begins.

Remember, in order to use their individual coverage HRA amount, employees must be enrolled in individual health insurance coverage, like a plan purchased through the Marketplace or from a private insurance company, or have Medicare coverage (Parts A and B or Part C). Short-term plans, or other limited benefits coverage like dental or vision insurance, don’t meet this requirement. There must be reasonable procedures in place to substantiate that employees and their families covered by the individual coverage HRA are enrolled in individual health insurance coverage.

You should consider how your employees can get individual health insurance coverage when picking a start date. For example, offering an individual coverage HRA starting on January 1 allows employees to choose coverage during the individual market’s annual Open Enrollment Period, and in most cases plan deductibles reset on January 1 each year. If you’re ending a traditional group health plan coverage to offer an individual coverage HRA, or a class of employees is offered a new individual coverage HRA, your employees may qualify for a Special Enrollment Period.

Get help: Talk to a licensed tax professional, benefits specialist, or health insurance agent or broker to find out more about whether an individual coverage HRA or traditional group coverage is right for your business.

Exploring coverage options?

Find out more about how an individual coverage HRA compares to other products and services that may be available to help you cover your employees.

Employees: Understanding individual coverage HRAs

If you’re an employee who has been offered an individual coverage HRA by your employer, learn more about individual coverage HRAs and the Marketplace.