Stand-Alone HRAs - Small Business Do's and Don'ts

May 27, 2013

Stand-alone Health Reimbursement Arrangements, also called Health Reimbursement Accounts or HRAs, offer small businesses an affordable way to offer health benefits without the cost or complication of group health insurance. Stand-alone HRAs are not linked to a group health insurance plan. HRAs allow any small business to reimburse employees tax-free for out-of-pocket medical expenses, including individual health insurance premiums.

Do's Dont's HRAs

Stand-Alone HRA Overview

When a small business sets up a stand-alone HRA, each employee chooses an individual or family insurance plan that best fits their situation. The small business uses the HRA to reimburse employees for their health care expenses, according to the terms of the HRA plan. In other words, the small business sets a defined amount to contribute to employees health care, sets the terms of the HRA, and the employees decide how to spend it. A stand-alone HRA is also called a "pure" defined contribution plan.

Stand-alone HRAs are the ideal small business health benefits solution now, and into 2014. Starting in 2014, each state's health insurance marketplace will offer federally-subsidized individual insurance policies (for eligible employees), and all plans will be guaranteed-issue.

So, what is the right way for a small business to set up an HRA? Here are five best practices for small businesses setting up an HRA plan, and three HRA "don'ts."

Stand-Alone HRAs - 5 Small Business "Do's"

  1. Set Affordable HRA Allowances: Set employee HRA allowances (the benefit levels) at a rate the small business can sustain. It is always better for employee relations to increase the benefit level rather than decreasing the benefit level.

  2. Keep the HRA simple: Small businesses should be able to explain to employees how the HRA works in a sentence or two. 

  3. Use HRA Software: HRA Software allows the small business to administer the plan 24/7 online, easily add reimbursements to payroll, and change HRA design (and HRA plan documents) at any time, with no additional fees. HRA Software also makes it easy for employees to view their HRA benefit and submit requests for reimbursement anytime, online.

  4. Educate Employees: Select an HRA Software administrator that provides a clear Summary of Benefits and Welcome Kits to employees. This will contribute to employee satisfaction.

  5. Select an Insurance Broker: Work with an insurance broker to help employees select and purchase individual health insurance policies. Select an insurance broker familiar with individual health insurance policies, HRAs and health care reform.

Stand-Alone HRAs - 3 Small Business "Don'ts"

  1. Don't Let Employees Contribute:  HRAs are, by definition, 100% employer-funded. Allowing employees to contribute invalidates the HRA tax benefits. 

  2. Don't Self-Administer an HRA: Self-administering the HRA puts the small business at risk of violating IRS (tax benefits), HIPAA (medical privacy), ERISA, and ACA (health care reform) compliance issues. Using an HRA Software provider ensures compliance with these issues for the small business.

  3. Don't Forget to Update the HRA Plan by 2014: As part of health care reform, most HRAs will need minor plan design changes to be health care reform compliant by 2014. 

  4. Don't Use an HRA Debit Card: HRA debit cards require pre-funding, and often result in a "pay and chase" situation for the employer.

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