Stand-alone Health Reimbursement Accounts (HRAs) have been a popular tool used by small businesses for reimbursing employees for individual health insurance and out-of-pocket medical expenses. The Affordable Care Act, however, limited the use of stand-alone HRAs. With stand-alone HRAs off the table for most employers, what are the alternatives?
Small businesses looking to help employees with health insurance and medical costs have four realistic alternatives. Each type of arrangement works differently. Let’s take a look.
HRA Alternative #1 - Healthcare Reimbursement Plan
Employers who want to reimburse employees tax-free for individual health insurance can adopt a Section 105 Healthcare Reimbursement Plan.
Healthcare Reimbursement Plans (HRPs) are employer-funded plans used for tax-free reimbursement of individual health insurance premiums. HRPs are a type of Section 105 Medical Reimbursement Plan and are specifically designed to comply with new Affordable Care Act rules.
HRPs are 100% employer-funded and there is no maximum annual contribution.
HRA Alternative #2 - Health Insurance Stipend
A second alternative for employers who want to help with employees’ health insurance costs is to adopt a taxable health insurance stipend.
With a health insurance stipend, all similarly situated employees receive a fixed, taxable stipend to purchase individual health insurance, whether or not they actually purchase health insurance.
Related: Health Insurance Stipend vs. A Reimbursement Plan - Which is Better?
HRA Alternative #3 - Health Savings Account
Another alternative to consider is a Health Savings Account (HSA). HSAs are individual bank accounts owned by employees that allow for tax-free payment or reimbursement of eligible medical expenses. HSAs may be used for a wide range of medical expenses, but it’s important to note that HSAs may only be used toward health insurance premiums in limited situations.
With an HSA, anyone (employer, employee, or third party) may contribute. An employer usually offers an HSA alongside an HSA-qualified high deductible health plan, but not always. To be eligible for an HSA employees must have an HSA-qualified high-deductible health plan.
HRA Alternative #4 - Flexible Spending Account
The last alternative to a stand-alone HRA is to offer a Health Flexible Spending Account (FSA). FSAs are employer-established plans that allow for tax-free reimbursement of qualified medical expenses, but may not be used on health insurance premiums. Most often, FSAs are employee-funded and there is a $2,500 annual contribution maximum for 2015.
Related: Which Pre-Tax Healthcare Accounts are Available to Small Employers?
Conclusion
In the past, small businesses have used Stand-alone HRAs to reimburse employees for healthcare expenses, including individual health insurance. With recent health reform changes, however, small businesses are adopting HRA alternatives including HRPs, health insurance stipends, HSAs, and FSAs.
Do you have a question about HRA alternatives? Or, what HRA alternatives are you seeing small businesses adopt? Leave a comment below.
