Not long ago, a client of mine came to me concerned about increases in premium for his kitchen cabinetry business.
That year he was facing a 20% increase in premium!
At that time, his company had 52 employees and his group health insurance plan was already a higher deductible plan, assigning a $2000 deductible for each of his employees.
What could he do? Was there any way he could lower his group health insurance costs?
We sat down together to explore some of his options. After planning and considering, my client ended up spending less on health care than the previous year.
How did we do it?
Through an HRA.
My client ended up selecting a group health insurance plan with an even higher deductible than his previous group health insurance policy – $5000 per employee. With this higher deductible plan, my client’s premium increase was only 6%.
But he also funded a $3000 HRA for each employee. Each employee could use the money from the HRA to pay the first $3000 of their deductible.
If the employee did not spend more than $3000 in deductibles that year, they never had to spend money out of their pocket to cover deductible expenses. If they did spend the $3000 HRA, their out-of-pocket deductible was still $2000, like the year before.
This meant that the employee’s expenses would not increase. In fact, it was more likely that they would end up spending less of their own money.
This solution ended in a win-win for both the employer and the employee!
Group health care insurance is expensive! Usually, this is the second or third largest operating expense for most businesses. And just like my client, I’m sure you have received group health insurance quotes with huge increases and probably left you asking, “How can I mitigate and control my group health costs?”
For some businesses, the perfect solution is a Health Reimbursement Arrangement or HRA. I have successfully helped dozens of clients use HRAs as a way to reduce their costs while assisting their employees with their health care costs.
If you want to know more about this option, keep reading as I explain:
- What is an HRA and how it works
- The different types of HRAs
- Advantages and disadvantages of HRAs
- How to know if an HRA is right for your business
What is an HRA?
A Health Reimbursement Arrangement (HRA), sometimes mistakenly referred to as a “health reimbursement account”, is an IRS-approved, employer-funded, and tax-advantaged plan.
A Health Reimbursement Arrangement allows employers to use part of their revenue to reimburse their employees for qualified health expenses. One of the biggest advantages for the employer is that the revenue used for reimbursements is not taxed. Essentially this type of plan turns taxable income into non-taxable income.
On the employee side, HRAs benefit employees in that they help to cover a portion of the employee’s deductible expenses. On average, most people don’t spend more than $1000 per year in deductibles. Most HRAs are set up to cover at least that amount and often more.
To summarize, an HRA is a plan offered by employers in which they agree to contribute an annual or monthly amount of funds to their employees for reimbursing their medical expenses.
How does an HRA work?
Every HRA is different depending on how you as the employer decide to set it up.
For example, you as the employer decide when the HRA will begin to fund your employee’s deductible expenses. You may decide that your employees need to pay the first $1000 of their $2000 deductible and the HRA will cover the second $1000 of the deductible. Or you could decide the opposite – to cover the first $1000 of their $2000 deductible and have your employee be responsible for the remainder of the deductible.
Your group health insurance agent will walk you through all the choices you need to make regarding your HRA. Your agent will be able to help you understand the pros/cons of the options presented to you.
While each HRA is unique, all HRAs follow the same five-step process:
1. The employer sets the allowance
You, as the employer, determine how much tax-free money you want to set aside for employee reimbursements. You can do this by the year, which is most common, or by the month. You agree to the maximum amount you will reimburse each employee for that year.
2. Employees incur medical costs
Next, the employees incur medical costs and pay for them out of their own pockets. It is important to note that only qualified expenses will be reimbursed.
Qualified medical expenses include things like doctor’s office visits, x rays, MRIs, prescription medications, etc. These expenses are defined under the IRS code for HRAs. An HRA would not cover unqualified expenses such as acupuncture, natural supplements, health club dues, cosmetic surgery, etc.
3. Employees submit proof of medical expenses
Now that the employee has incurred expenses, they will want to be reimbursed. To be reimbursed, the employee must submit documentation to their employer.
Usually, the documentation would be receipts or an explanation of benefits (EOB) from the insurance company. Sometimes the documentation is submitted to a Third Party Administrator (TPA) contracted by the employer. Employers often contract a TPA to process the documentation to ensure that they are following IRS guidelines.
4. The employer or TPA (Third Party Administrator) reviews the documentation
Next, the documentation has to be reviewed for validity. The employer or TPA will verify that the expenses qualify for reimbursement. Remember that qualified expenses are predetermined according to IRS guidelines.
5. Employee is reimbursed
Finally, after everything has been verified, the employee will receive reimbursement from their employer or through a Third Party Administrator.
The Six Types of HRAs
HRAs have been legally used since 2002 when they were defined by the IRS. However, since then, different types of HRAs have been developed and approved.
As of 2020, there are six types of HRAs.
1. Group Coverage HRA
- The most common HRA
- Available to companies that also offer a group health plan
- Businesses of all sizes can utilize this type of HRA
- Mostly helps to cover deductible expenses for employees
2. Qualified Small Employer HRA (QSEHRA)
- Created in 2016 and steadily increasing in popularity
- Business must have fewer than 50 employees
- Government limits on how much an employer can offer to employees depending on if they are a single insured or has a family on the plan
- The employer can not offer a group health insurance policy with this plan
3. Individual Coverage HRA (ICHRA)
- As of January 1, 2020, employers of all sizes can offer this plan
- Businesses can offer a monthly allowance to help employees pay for individual coverage
- Employees are permitted to be reimbursed up to the allowance amount
- Participating employees must have individual coverage
- A Third Party Administrator is helpful in coordinating this type of plan
4. Retiree HRA
- Offered only to retired employees
- Works much like an Individual Coverage HRA
- Businesses of all sizes can offer this plan
5. Excepted Benefit HRA
- This is probably the most confusing type of HRA
- The employer required to offer a group insurance plan
- Employees are not required to participate in the group insurance plan
- This plan can cover expenses not covered in the group insurance plan
- This plan can also be used to pay limited dental and vision plan premiums, COBRA premiums, premiums for short-term limited duration plans, as well as, cost-sharing
6. Dental and/or Vision HRA
- Used to make reimbursements exclusively for expenses related to company offered dental or vision plans
Advantages and Disadvantages of HRAs
What are the advantages of HRAs?
1. HRAs help to control an employer’s costs.
HRAs make it possible for employers to self-fund a portion of their health care costs. Because the employer usually uses this option with a higher deductible health plan, they pay a lower premium. Money that would have been spent covering a greater premium for a lower deductible health plan is redirected to an HRA.
If the money set aside in the HRA goes unused by employees, you can reallocate that money somewhere else.
There is a very good chance that less than 40% of the maximum HRA allowance will be utilized by their employees. Remember with an HRA, employees don’t pay for expenses until after a claim is filed and reviewed.
2. HRAs are often used with higher deductible health plans
Higher deductible health plans are less expensive than lower deductible plans. This will help reduce an employer’s premium costs while still providing excellent coverage for your employees.
One interesting thing to note here is that in Western Pennsylvania, a higher deductible plan has a deductible of $500 or more. Nationally, however, higher deductible health plans usually have a deductible of $2000 or more.
3. Tax-Advantaged Account
The HRA contributions are 100% tax-deductible for the employer. Any HRA reimbursements made to your employees are not included in taxable revenue.
4. HRAs are flexible.
One advantage of an HRA is that each company can design their HRA to best suit their needs along with the needs of their employees. A well-planned HRA will actually increase the number of benefits covered for employees leading to employee retention and help in talent recruitment.
What are the disadvantages of an HRA?
While there are only a few disadvantages of an HRA, they are worth noting:
1. Employees can not take HRA funds with them.
Because the allowances are company funds, employees cannot take HRA money with them if they leave a company. These funds belong to the business and not the employee. Any of the company funds that go unused remain with the company.
This is one way that a Health Reimbursement Arrangement is different from a Health Savings Account (HSA). With an HSA, the funds belong to the employee. If an employee leaves the company, HSA funds still belong to the employee.
2. HRAs are not standardized.
Each employer can structure their HRA to their liking and needs. Because it is not standardized, employees moving from one company to another company may find that the new company’s HRA differs significantly from their previous employer’s HRA.
3. Self-employed individuals are not eligible for an HRA.
For your company to qualify for an HRA, you must have at least one eligible employee.
Is an HRA right for my business and employees?
While HRAs have many advantages and benefits, they are not right for everyone. To help determine if an HRA is right for your business consider the following questions:
1. Does your company meet the HRA eligibility guidelines?
2. Can your company afford to pay the maximum allowance for the HRA?
3. Will the HRA make your employees more satisfied with your company’s benefits?
4. If you are a small business, can you afford group health insurance at all? If not, would you consider the Qualified Small Employer HRA?
5. Do you want to begin controlling costs and monitoring health expenses?
If you can answer “yes” to the above questions, an HRA is a great way for you to begin controlling your group health care costs!
Should I administer my HRA or should I use a Third Party Administrator?
In almost all cases, an employer will want to use a Third Party Administrator (TPA) to administer their HRA plan.
Why? HRAs can be complex and confusing. You can quickly find yourself out of compliance with a myriad of laws and regulations if you try to administer this type of plan on your own. This is especially true if you do not have experience in HRA administration.
Another benefit of utilizing a TPA is that most TPA’s have real-time reporting features. They monitor any HRA liabilities, process reimbursements, and file or generate any tax reporting.
So how do you find a good TPA to administer your plan?
When I am working with a client to set up an HRA, it is my responsibility, as their agent, to prepare a list of three or more Third Party Administrators that would fit the needs of their business. Typically, I would provide my client with a list of TPAs that are reputable and have been administering HRAs for many years.
I also share with my clients a list of pros and cons of what these various TPAs would provide for their company. We would discuss how these different TPAs process claims and if they offer any electronic services.
Sometimes TPAs offer services such as a phone app where your employees can quickly view how much money from their HRA that they have used and are also able to submit their documentation from the services they received.
How much will this cost me?
Typically, TPAs will charge between $4 and $6 per employee per month. This amount can vary depending on the number of services like a phone app that your TPA will be providing for you. Sometimes this fee is even waived!
Do insurance companies administer HRAs?
Sometimes an insurance company will “integrate” an HRA with a health insurance plan that has a higher deductible.
Generally speaking, the business needs to employ more than 50 employees for this to be an option. Also, it is important to note that an insurance company will not be as flexible as a TPA and will have much more standardization.
While an insurance company may not charge a fee for the HRA administration, they could “bump” your insurance premiums by a few percentage points to pay for the HRA service.
I think an HRA might help me. What now?
HRAs are a great way for companies to begin controlling their group health costs without decreasing their employees’ benefits. HRAs also allow small and mid-sized businesses to “customize” their benefits in a space that normally requires standardized plans and features. And for small businesses, HRAs might even be an alternative to group health insurance altogether.
If you are looking for ways to take more control of your group health insurance costs, our employee benefits team at Baily Insurance Agency can help you explore options like HRAs.
Our team has in-depth knowledge of HRAs and other cost-saving options that might benefit your business. We work hard to provide our clients with a comprehensive employee benefits package for their business.
As I said earlier in this article, HRAs are sometimes the perfect solution for a business to help them with their group health insurance program. But they are not the perfect solution for every business. Another option you should consider is the possibility of using Health Savings Accounts (HSAs).
While an HSA is similar to an HRA, these two options have some significant differences. If you would like to learn more about these options, please schedule a consultation with one of our employee benefits experts.