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Small Business Health Reimbursement Arrangement

Everything you need to know about the Small Business HRA and the SBHRA law

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A guide to the Small Business Health Reimbursement Arrangement

The Small Business Health Reimbursement Arrangement (HRA) is a new compliant health benefit created by federal law in 2016. A Small Business HRA allows businesses with fewer than 50 employees to reimburse employees for individual health insurance and medical expenses.

With a Small Business HRA, employees purchase their own individual health insurance independent of the company. The company then reimburses each employee tax-free for their individual health insurance and medical expenses up to a set monthly allowance.

Although the concept of reimbursing employees for individual health insurance expenses has been around for many years, compliance concerns have made many small businesses hesitant to make the switch—until now.

Thanks to the Small Business Healthcare Relief Act (SBHRA), small businesses can offer a strong health benefit that provides greater value to employees.  

How does the Small Business HRA work? How is it implemented? Which laws brought it into effect?

This guide provides a comprehensive summary of the Small Business HRA and the SBHRA.


About the Small Business HRA

The new Small Business HRA is available to qualified small businesses starting January 1, 2017.

A Small Business HRA is a company-funded, tax-free health benefits plan used to reimburse employees for individual health insurance and medical expenses.

Here's how the Small Business HRA works:

  • The HRA is available to small businesses (with fewer than 50 full-time employees) that do not offer a group health plan to any of their employees.

  • Businesses use the HRA to reimburse employees tax-free for health insurance premiums and other out-of-pocket medical expenses.

  • A company's annual contributions are capped at $4,950 for a single employee and $10,000 for an employee with a family. HRAs are 100 percent company funded; employee contributions are not allowed.

  • Employees with a Small Business HRA are required to have minimum essential coverage to receive HRA reimbursements. 

  • Employees with a Small Business HRA may access premium tax credits. However, if an employee is eligible for a premium tax credit, the amount of the credit will be reduced by the monthly HRA amount.

  • Generally, a company must make the same HRA contributions for all eligible employees. However, amounts may be varied based on family status.

  • The Small Business HRA is similar to the Stand-Alone HRA, which was made noncompliant for more than one participant by the Affordable Care Act (ACA). However, there are key differences. Here is a chart to compare the two HRAs.

  Stand-Alone HRA (2+ participants) Small Business HRA
Currently available and compliant? No. Yes, effective January 1, 2017.
Limits on company size? No. Yes. Available only to companies with fewer than 50 full-time-equivalent employees.
Eligibility restrictions allowed? Yes. Companies may restrict eligibility based on bona fide job criteria. No. Generally, all employees are eligible for the HRA. Companies may exclude employees who are part-time or seasonal.
Employees required to have insurance? No. Yes. Employees are required to have minimum essential coverage.
Different contribution amounts allowed? Yes. Companies may restrict contribution amounts based on bona fide job criteria and/or family status. Yes, but limited. Generally, a company must make the same HRA contributions for all eligible employees. However, amounts may vary based on family status.
Annual contribution limits? No. Yes. HRA annual contributions will be capped at $4,950 for a single employee and $10,000 for an employee with a family. 

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Frequently asked questions (FAQs)FAQs on the SBHRA and Small Business HRA

1. What is a Stand-Alone Health Reimbursement Arrangement (HRA)?
A Stand-Alone HRA (an HRA not integrated with a group health insurance policy) is an arrangement funded solely by a company that reimburses an employee for healthcare expenses such as health insurance premiums, copays, deductibles, and other IRS-qualified medical expenses.

Similar to premiums paid under company-provided coverage, reimbursements made through an HRA are tax-free.

2. Why have Stand-Alone HRAs been limited?
Stand-Alone HRAs are generally considered to be group health plans and are therefore subject to the market reforms put in place by the ACA. This includes the prohibition against lifetime and annual limits on essential health benefits (EHB) and the requirement to provide certain preventive services without cost-sharing.

A Stand-Alone HRA generally places limits on EHBs and does not require coverage of certain preventive services without cost-sharing, and thus may violate these market reforms.

If a small business offers an HRA in violation of the reforms, among other group health plan requirements, an excise tax of $100 per day, per employee may be assessed under IRC § 4980D. (Note: This tax may be limited to 10 percent of the amount paid under the plan if the failure is due to reasonable cause and the tax can be avoided entirely if the company can show that they did not know that the failure existed and it is corrected within 30 days).

3. What is the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)?
The QSEHRA, another name for the Small Business HRA, is an HRA exempted from certain compliance requirements and associated penalties. Similar to the Stand-Alone HRA, the Small Business HRA allows a qualified small business to use tax-free dollars to assist employees with the purchase of health insurance and related medical expenses.

Similarities with the Stand-Alone HRA are many; however, the new Small Business HRA establishes company contribution limits ($4,950 for employee only or $10,000 for employee plus family), a coordination with premium tax credits, and a requirement for participants to have minimum essential coverage.

4. Who is allowed to use the new Small Business HRA?
Small business: The law allows the Small Business HRA to be offered by businesses with fewer than 50 full-time-equivalent employees thatdo not currently offer a group health plan any of their employees (other than the Small Business HRA).

Employee: With few exceptions, all W-2 full-time employees of the small company are eligible to participate in the Small Business HRA. The law requires employees to be covered by a health plan that meets minimum essential coverage to receive contributions tax-free.

5. What can the Small Business HRA be used for?

Employees, their spouses, and their dependents are all eligible to have medical, dental, and vision expenses reimbursed with the Small Business HRA. They do not need to be on the same insurance policy, and they do not need to have individual health insurance.

There are many acceptable coverage combinations, including being on a spouse's or parent's insurance. However, participation eligibility does require that employees and their families show proof of minimum essential coverage.

There are two categories of expenses employees and their families can have reimbursed: insurance premiums and medical expenses. Insurance premiums can only be reimbursed if they are for an individual medical, dental, or vision policy. Pre-tax contributions to a group insurance policy are not eligible. Copays, deductibles, and many other medical expenses can be reimbursed regardless of association with a group or individual insurance policy.

6. How does the SBHRA affect a company’s Healthcare Reimbursement Plan (HRP)?
While the SBHRA provides small businesses with additional health benefits options, it does not prevent or impact a company’s ability to offer a Healthcare Reimbursement Plan (HRP). Small business owners and employees might prefer a Small Business HRA due to its reduced compliance requirements and ability to reimburse out-of-pocket medical expenses in addition to health insurance premiums.

The Comprehensive Guide to the Small Business HRA

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Summary of legislation

U.S. Senators Charles Grassley (R-IA) and Heidi Heitkamp (D-ND) and Congressmen Charles Boustany (R-LA) and Mike Thompson (D-CA) introduced the bipartisan legislation in the Senate (S. 3060) and House (H.R. 5447), respectively, referred to as the Small Business Healthcare Relief Act (SBHRA). The legislation was then repackaged with minor changes into the 21st Century Cures Act (H.R. 34).

As a result of the September 2013 guidance issued jointly by the Departments of the Treasury, Health and Human Services, and Labor, small business owners were limited in their ability to use stand-alone health reimbursement arrangements (HRAs).

The SBHRA addressed this by ensuring small business owners can use Health Reimbursement Arrangements to assist employees with individual health insurance and medical expenses. The legislation introduced a Qualified Small Employer Health Reimbursement Arrangement, also known as a Qualified HRA or Small Business HRA, that:

  • allows small businesses to use tax-advantaged funding to assist employees with their out-of-pocket health insurance and related medical expenses, and

  • provides exemptions from current ACA compliance requirements and associated penalties.

The SBHRA provides relief on multiple fronts to small businesses by expanding affordable healthcare options, easing the burden of healthcare-related administration, and helping companies to remain competitive for purposes of recruitment and retention.

Lastly, the SBHRA benefits employees by affording them the flexibility and cost savings to personally choose the most appropriate health plan for their unique healthcare needs on the individual market.

Learn how the Small Business HRA works today.

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Read the legislation

 To view the full Small Business Healthcare Relief Act text as part of the 21st Century Cures Act, please visit:

H.R. 34, Section 18001.


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Coalition and congressional support

HRA coalition letter (June 15, 2016) from Zane Benefits

Zane Benefits, and 63 other small business advocates, delivered a joint letter to House and Senate lawmakers on June 15, 2016 urging Congress to move swiftly to pass this vital legislation. 

HRA leadership letter (December 4, 2015) from Zane Benefits

Zane Benefits, and 25 other small business advocates, delivered a joint letter to House and Senate lawmakers on December 4, 2015 urging Congress to move this commonsense legislation forward.

HRA coalition letter (December 4, 2015) 

Zane Benefits, and 15 other major organizations, delivered a joint letter to House and Senate lawmakers on July 13, 2015 urging Congress to move swiftly to pass the Small Business Healthcare Relief Act.















Coalition membership grew continually while the bill was being considered in Congress. Among others, the following associations publicly expressed their support for the Small Business Healthcare Relief Act:

  • Society of American Florists

  • The American Dental Association

  • The Tire Industry Association

The legislation also garnered cosponsor backing from a lengthy list of Congressional supporters.

House (59)
Rep. Mike Thompson (D-CA)*
Rep. Kristi Noem (R-SD)
Rep. Patrick Meehan (R-PA)
Rep. Robert Dold (R-IL)
Rep. Patrick Tiberi (R-OH)
Rep. Peter Roskam (R-IL)
Rep. Erik Paulsen (R-MN)
Rep. George Holding (R-NC)
Rep. Mike Kelly (R-PA)
Rep. Devin Nunes (R-CA)
Rep. Tom Price (R-GA)
Rep. Kenny Marchant (R-TX)
Rep. Vern Buchanan (R-FL)
Rep. James Renacci (R-OH)
Rep. Linda Sanchez (D-CA)
Rep. Bill Pascrell (D-NJ)
Rep. Earl Blumenauer (D-OR)
Rep. Brad Ashford (D-NE)
Rep. Kurt Schrader (D-OR)
Rep. Anna Eshoo (D-CA)
Rep. Collin Peterson (D-MN)
Rep. Ron Kind (D-WI)
Rep. John Larson (D-CT)
Rep. Norma Torres (D-CA)
Rep. Kyrsten Sinema (D-AZ)
Rep. Suzanne Bonamici (D-OR)
Rep. Denny Heck (D-WA)
Rep. Rod Blum (R-IA)
Rep. Cathy McMorris Rodgers (R-WA)
Rep. Martha McSally (R-AZ)
Rep. Bill Flores (R-TX)
Rep. Jim Cooper (D-TN)
Rep. Alan Lowenthal (D-CA)
Rep. Eric Swalwell (D-CA)
Rep. Kathleen Rice (D-NY)
Rep. Derek Kilmer (D-WA)
Rep. Markwayne Mullin (R-OK)
Rep. Richard Hudson (R-NC)
Rep. Kevin Cramer (R-ND)
Rep. Bill Johnson (R-OH)
Rep. Ryan Costello (R-PA)
Rep. Lou Barletta (R-PA)
Rep. Michael Turner (R-OH)
Rep. Reid J. Ribble (R-WI)
Rep. John Abney Culberson (R-TX)
Rep. Jeff Fortenberry (R-NE)
Rep. Rick W. Allen (R-GA)
Rep. Jackie Walorski (R-IN)
Rep. Scott Tipton (R-CO)
Rep. Mike Pompeo (R-KS)
Rep. Mike Bishop (R-MI)
Rep. Todd Rokita (R-IN)
Rep. Diane Black (R-TN)
Rep. Steve Stivers (R-OH)
Rep. David Reichert (R-WA)
Rep. Daniel Lipinski (D-IL)
Rep. Jason Smith (R-MO)
Rep. Tammy Duckworth (D-IL)
Rep. Joe Courtney (D-CT)

Senate (19)
Sen. Heidi Heitkamp (D-ND)*
Sen. Rob Portman (R-OH)
Sen. David Vitter (R-LA)
Sen. Cory Gardner (R-CO)
Sen. Pat Roberts (R-KS)
Sen. Johnny Isakson (R-GA)
Sen. Ron Johnson (R-WI)
Sen. Michael Bennet (D-CO)
Sen. Christopher Coons (D-DE)
Sen. Jon Tester (D-MT)
Sen. Mark Warner (D-VA)
Sen. Lisa Murkowski (R-AK)
Sen. Claire McCaskill (D-MO)
Sen. Thomas R. Carper (D-DE)
Sen. Marco Rubio (R-FL)
Sen. Kelly Ayotte (R-NH)
Sen. Orrin Hatch (R-UT)
Sen. John Hoeven (R-ND)
Sen. James E. Risch (R-ID)
* Denotes original cosponsor

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