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Small Business Employee Benefits and HR Blog

6 Reasons to Set Up a Health Reimbursement Arrangement (HRA)

March 15, 2013

Health Reimbursement Arrangements (HRAs) are employer-funded plans that provide employees with pre-tax dollars for out-of-pocket medical expenses (including health insurance premiums). Here are six reasons companies choose to offer Health Reimbursement Arrangements.HRA Change Ahead

Reason #1: HRA for Premium Reimbursement

If group health insurance is not an option, a Health Reimbursement Arrangement (HRA) allows a company to offer employee health benefits.  Rather than offering a defined benefit (group health insurance), a company defines an amount to contribute towards employees' premium and medical expenses.  With this type of defined contribution (or stand-alone) HRA, cost for the employer is defined (controlled).  And, since employees purchase their own personal policy, they can keep the policy when they leave the company.  More often than not, the cost of an individual or family policy is less expensive than the same coverage under a group policy.

Reason #2: HRA for Deductible Supplement

If your current group health insurance plan is unaffordable, a Health Reimbursement Arrangement (HRA) can be used in conjunction with a High Deductible Health Plan (HDHP) to save money while still offering similar coverage for employees.  With this type of Integrated HRA a company would:

  • Increase the annual deductible on their existing group policy. This lowers the company's monthly premium cost up to 50%.
  • Give each employee a tax-free HRA Allowance. Employees use HRA funds to cover all expenses they incur because of the higher deductible. Total HRA reimbursements cost approximately 2/5 of the 50% saved on monthly premium because not all employees will fully use their HRA funds.

  • Employers save up to 30% with no change in employee health benefits. Benefits can be customized for each Class of employees to maximize Recruiting and Retention.

Reason #3: HRA Balance Carry-Over

If you have a medical reimbursement plan with no carry-over, switching to a Health Reimbursement Arrangement can allow employees to carry forward unused funds each plan year. Some employers, who already have employer-funded medical or dental reimbursement plans with low annual limits, may wish to add a carryover feature so that unused amounts from one year are available in subsequent years.  For example, an employee who uses $0 of the $1,000 annual limit in plan year #1 has a carryover, making available an increased $2,000 limit in plan year #2.

Reason #4: No HRA Pre-Funding

If you are currently make contributions to health savings accounts (HSAs) on behalf of employees, switching to a Health Reimbursement Arrangement will allow the company to save money based on utilization (because any unused HRA funds stay with the company after the employee terminates employment).  

Also, if you are currently using an HRA Administrator that requires pre-funding, switching to an HRA Software Administrator (with no pre-funding required) will free up operational money for your business.

Reason #5: HRA Compliance

If you currently pay for your employee's health insurance premiums informally, setting up an HRA for your company will ensure compliance with HIPAA and ERISA laws including:

  • Affordable Care Act (ACA) Requirements

  • HIPAA Privacy

  • COBRA

  • Medicare Reporting

  • IRS Plan Documents

  • ERISA-Compliant Reimbursement of Individual Health Plans

 Failure to comply with HIPAA and ERISA requirements can be costly.  

Reason #6: HRA Tax Savings

If you currently pay for your employees health insurance premiums informally, such payments will need to be reported as taxable income to the employees. By setting up an HRA (and HRA plan documents), employees receive dollars 100% tax-free. Additionally, employers can deduct reimbursements as a non-taxable business expense.  

An IRS-compliant defined contribution health plan will ensure the tax deductibility of employee's individual health insurance premiums.

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