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Small Business Employee Benefits and HR Blog

How to Pair HRAs with Health Insurance Subsidies for Cost Savings

September 6, 2013

Many small employers are combining Health Reimbursement Arrangements (HRAs), individual health insurance, and the new health insurance subsidies to create affordable health benefits that employees love.

As background, the Affordable Care Act (ACA) introduces individual health insurance subsidies to help make individual health insurance premiums more affordable. The health insurance subsidies will be available to eligible employees starting January 1, 2014.

Employers can help employees get access to these discounts by offering a health reimbursement arrangement (HRA) instead of traditional group health insurance.HRA and Health Insurance Subsidies the Perfect Pair

Pairing HRAs with Health Insurance Subsidies for Cost Savings

Many small employers are transitioning away from group health insurance (because of the cost, participation, hassle, etc.) and instead offering a standalone Health Reimbursement Arrangement (HRA). With the HRA, employees receive a set monthly allowance to spend on their choice of qualified health insurance and/or other medical expenses.

Small employers are especially attracted to this solution because it provides a formal, tax-deductible benefit to employees, while also giving the employer more fiscal control and predictability over the cost of health benefits.

With this approach, an employer would follow these four easy steps:

  1. Not offer a traditional group health insurance plan (which disqualifies employees from the subsidies).

  2. Offer employees defined contribution health benefits by setting up a standalone HRA plan. The HRA is the vehicle for giving employees a tax-free healthcare allowance to use on qualified individual health insurance and medical expenses. 

  3. Assign a health insurance broker to help employees enroll in health insurance through the state exchange, and receive a discount via a health insurance subsidy (if eligible). Employees can also enroll in health insurance "off" the exchange through a broker or private exchange.

  4. Reimburse employees tax-free on payroll, after employees submit proof of their health insurance or medical expenses to their HRA provider.

Which Employees Will Benefit From the Health Insurance Subsidies?

If employees meet certain income requirements, and do not have access to an affordable employer-sponsored or government health insurance plan, then they will be eligible for the health insurance subsidies. (Note: Offering a standalone Health Reimbursement Arrangement does not disqualify them for the health insurance subsidies because an HRA is not considered a qualified health plan under ACA.)

Eligibility is based on a standard called the "federal poverty level" (FPL). The employee's subsidy will cap the cost of their health insurance between 2% and 9.5% of his or her annual income, depending on how much money they make. Employees who earn up to 400 percent of FPL may be eligible. This translates to an individual earning up to $45,960 in 2013 and a family of four earning up to $94,200 in 2013.

These charts show income levels eligible for the subsidies, examples of the subsidies, the and max cost eligible employees would pay for insurance (before the employer's HRA contribution).

income chart fpl

subsidies

See detailed health insurance subsidy charts here.

What About Employees Not Eligible for the Health Insurance Subsidies?

Employees not eligible for the subsidies, because of household income or access to coverage under a spouse's health insurance plan or government program, can still use the HRA for their non-exchange health insurance premium expenses and/or other eligible medical expenses.

Example of Pairing HRAs with Health Insurance Subsidies

A hair salon in Fort Collins, Colorado employees 8 full time stylists and is able to offer health benefits for the first time using a standalone HRA. The salon makes available $150/month to each employee for their health insurance and medical expenses.

One of the stylists, Mary, is 27-years old, single, and makes $29,000 annually in 2014. 

Because the hair salon does not offer a traditional group health insurance plan to employees, Mary is eligible for a subsidized insurance policy through her state exchange, based on her income and family size.

Mary purchases health insurance for herself from her state’s health exchange for a discounted price of $196/month. This includes a government subsidy of $85/month.

Through the HRA, the salon reimburses Mary $150/month pre-taxed. After the government discount and the salon's contribution, Mary's total out-of-pocket amount is only $46/month.

What are your questions about how to pair an HRA with the health insurance subsidies? Leave a comment below and join the discussion.

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