Many employers that self-administer an HRA often overlook important compliance obligations that put them at financial risk. Failure to comply with the minimum HRA administration requirements is common and can be costly. And, if an employer does take the extra steps to fully comply, the administrative cost will likely outweigh the HRA Benefits.
Here are the top three reasons employers should consider using HRA Software to self-adminster an HRA:
- Tax Savings/IRS Compliance
- Federal Compliance
1. HRA Admin Software Creates Tax Savings
If an employer pays for employee's individual health insurance premiums without utilizing HRA admin software, such payments might need to be reported as taxable income to the employees.
Employees receive dollars 100% tax-free
The IRS requires that HRA plan documents be established in order for employees to deduct the individual health insurance premiums from taxable income on their annual W-2.
HRA Admin Software (and their tax benefits) increase the ability of employers to recruit and retain good employees.
Employers deduct reimbursements as non-taxable business expense
An IRS-compliant defined contribution health plan will ensure the tax deductibility of employee's individual health insurance premiums.
2. Federal Compliance
The federal government has guidelines for employers who want to contribute to employee's IRS-qualified medical expenses. An IRS/ERISA/HIPAA-compliant defined contribution health plan will ensure compliance with federal law.
Using HRA software, employees submit claims for health insurance premiums and other medical expenses online, via fax, or mail. Once submitted, claims are processed and employers click a button periodically to reimburse employees via check, payroll addition, or direct deposit; all reimbursements go directly from the employer to the employee at the time and method chosen by the employer. All claims are kept HIPAA-protected and all receipts are stored digitally in compliance with HIPAA for 10 years as required by the IRS for company and personal audit purposes.
Some companies might want to pay directly for an employee's individual health insurance plan without utilizing an ERISA and HIPAA-compliant defined contribution health plan, but doing so will put the employer out of compliance with federal regulations and increase the employer's (and employee's) tax liability.
There are two major reasons an employer should never pay for its employee's individual health insurance plan:
When an employer pays directly for an individual health insurance plan, they effectively endorse each employee's individual insurance plan as part of an employer-sponsored group health benefit offering. In other words, according to federal law, the employer is treating the individual plan as part of an employee welfare benefit plan regulated by ERISA. Because most individual health insurance plans do not meet minimum ERISA group plan requirements, the employer is out of compliance.
Separately, an employer is not allowed to know the details of employees HIPAA-protected medical expenses. Because most individual health insurance costs are based on an employee's health, the health insurance details must be HIPAA protected. When an employer pays for the individual policy, they can violate HIPAA-privacy requirements because they know the details of a HIPAA-protected employee expense.
3. Ease of Use
HRA Administration software allows an employer to administer the benefits program in less than 5-minutes per month! The process is completely online and paperless.
Pre-taxing occurs via payroll
HRA administration software does not require a Third Party Administrator (TPA) to touch the employer's money. All reimbursements go directly from the employer to the employee at the time and method chosen by the employer (typically via payroll).