Stand-alone Health Reimbursement Arrangements (HRAs) provide small businesses a way to offer employees excellent health benefits without the cost or complication of group health insurance.
An HRA is a Section 105, employer-funded, tax advantaged employer health benefit plan that reimburses employees for out of pocket medical expenses and personal health insurance premiums. A stand-alone HRA is not linked with a group health plan, rather the stand-alone HRA is the employee health benefit. A stand-alone HRA is also referred to as a "pure" defined contribution health plan or a stand-alone Health Reimbursement Account.
Here are eight (8) ways stand-alone HRAs help small businesses get out of the health insurance business and focus their valuable resources on growing their business, while still providing a valuable health benefit that helps recruit and retain key employees.
#1: HRAs Provide Employees Plan Choice
With a stand-alone HRA, the small business provides employees with a fixed HRA allowance. Employees then purchase any personal health insurance policy, and are reimbursed for their policy (up to the amount of their HRA allowance). Employees can choose any health insurance policy that fits their specific health needs including the type of plan (high-deductible, low-deductible, HSA-compatible, etc), what the plan covers (maternity, dental, etc) and carrier.
Compared to an employer-sponsored plan: With an employer-sponsored plan, the employer chooses and administers the insurance plan. Small businesses, however, have little bargaining power in the small-group market. Of businesses with less than 200 workers, 86% that offer an employer-sponsored plan only offer one (1) plan.
#2: HRAs Reduce Red Tape
Offering a stand-alone HRA reduces the time the business spends on health benefits administration and paperwork. Once the HRA plan is set up online, the health benefit becomes a payroll function where the small business uses HRA software to add reimbursements to payroll. For the average small business, HRA administration takes 5 minutes a month. Less administrative time means more time available to run and grow the business.
Compared to an employer-sponsored plan: Small businesses select their employees’ insurance plans and play a larger role in plan management.
#3: HRAs Offer Financial Predictability
Offering a stand-alone HRA aids financial predictability for small businesses. With a stand-alone HRA, the small business decides how much they will contribute to employees' health care expenses. There are no minimum or maximum amounts a business can contribute, so if a business wants to contribute any amount to employees' health care costs, they can afford a stand-alone HRA. This level of cost controls and flexibility leads to financial predictability, allowing the business to grow faster.
Compared to an employer-sponsored plan: While monthly premium rates are predictable, most businesses face an annual premium increase year after year. According to a recent study by Aon Hewitt, the average employer-sponsored health premium was projected to increase 6.3% in 2013. Steady 5-10% annual premium increases add up fast for any business.
#4: HRAs Free Up Cash Flow
A stand-alone HRA is a notional account and funds do not accumulate in a separate account. Rather, the business reimburses employees only after their employees incur expenses. Because the business does not need to pre-fund the HRA allowances, and only reimburses once employees show proof of eligible expenses, the HRA frees up cash flow for the business. This is valuable for any growing business and makes offering the benefit feasible for many start-ups and small businesses.
Compared to an employer-sponsored plan: Premiums are usually paid monthly or quarterly. The key difference is that with a stand-alone HRA, the business reimburses employees directly on payroll, and only for expenses they've incurred (up to the amount they have available).
#5: HRAs Help Increase Employee Morale
Provided in the right way (and using the right HRA Software provider), offering a stand-alone HRA increases employee morale because the small business is offering employees more choices and better choices than they currently have. Employees are no longer limited to the "one-size-fits-all" insurance choice. The portability of personal insurance policies is a great benefit to employees; when employees leave the business they keep their insurance policy. And, in 2014 all policies will be guaranteed-issue and affordable through the health insurance Marketplaces. There are two key factors when offering the HRA, however. (1) Choose the right HRA Software provider who will help educate employees and offers an easy-to-use online system, and (2) Coordinate with an insurance agent who can help employees select and purchase a personal insurance policy.
Compared to an employer-sponsored plan: Most employees are only familiar with a traditional employer-sponsored plan and because of this, many perceive a group health plan as a better benefit ("this is what we've always received"). And until recently there weren't state risk pools in every state, so for some sick employees coverage under an employer-sponsored plan was their best (if not only) option for coverage. This "moral obligation" to provide a guaranteed-issue group health plan goes away in 2014 when all individual policies become guaranteed-issue as part of health care reform.
#6: HRAs Get Small Businesses Out of the Health Insurance Business
Small businesses are are typically not health insurance experts, nor do small businesses want to spend valuable time gaining expertise. With limited resources and staff, the time spent comparing policies, dealing with questions/complaints, and managing the plan falls on the business owner. This is valuable time that could be spent growing the business. By offering a stand-alone HRA the small business can get out of the health insurance business and allow employees to make smart health insurance decisions for themselves.
Compared to an employer-sponsored plan: Time is required working with a broker to select the plan/s, manage questions or issues, and going through the renewal process each year.
#7: HRAs Lower Health Benefits Costs
A central idea behind stand-alone HRAs is that small businesses can offer a benefit that employees value while lowering overall health benefit costs. Cost savings are seen because:
The small business sets and controls the amount of HRA funds provided to employees.
The individual policies employees purchase cost, on average, 25-35% less than group health insurance policies for the same coverage. In other words, the business's money goes farther.
The small business controls what happens to employees' unused HRA funds at the end of the plan year, meaning the business can allow the unused funds to roll over, partially roll over or make the allowance use it or lose it (no funds roll over). These HRA features contribute to cost-savings and control of financial risk.
Compared to an employer-sponsored plan: The cost of group health insurance is defined by a few variables such as the type of plan/s selected, the carrier, and either the health and age of employees (in the 38 states where medical underwriting is currently allowed) or by community-rating.
#8: HRAs Allow Flexible Plan Design
With a stand-alone HRA there are no minimum participation requirements, and small businesses can offer different levels of benefits to different employees based on bona-fide job criteria such as job description, location, hours worked, etc. This flexibility in HRA plan design can help a business recruit and retain key employees and contain costs. For example, a business could offer $250/month for managers and $100/month for entry-level staff. Or, a business could start offering health benefits to only key directors and add an HRA benefit for other employees as the business grows.
Compared to an employer-sponsored plan: 50%-75% of employees must participate in the plan and there is less flexibility to offer different benefit levels to different employees.