Determining a budget for a stand-alone HRA is quite simple, because the cost of a stand-alone HRA is 100% controlled by the employer. This is one of the major benefits of offering a stand-alone HRA and why many small businesses and nonprofits are transitioning from traditional group health insurance to a stand-alone HRA.
What is a Stand-Alone HRA?
A stand-alone HRA is a "pure" defined contribution strategy. Rather than paying the costs to provide a specific group health insurance plan, an employer can fix their costs on a monthly basis by establishing a stand-alone HRA. HRA stands for Health Reimbursement Arrangement and is a Section 105 plan. The general concept of a stand-alone HRA is an employer would:
Not offer a group health insurance plan.
Define any amount they can afford for health benefits and use HRA Software to give each employee a fixed dollar amount to use for individual health insurance (or other medical expenses such as doctor visits and prescription drugs).
Select an Insurance Professional, and/or provide information about the new Health Insurance Marketplaces to help employees shop for and purchase individual health policies (typically, this saves the employee 25-50%).
Use HRA Administration Software to reimburse employees tax-free on payroll.
A stand-alone HRA is an affordable alternative to an traditional group health insurance plan that helps employers recruit and retain employees. HRAs by themselves are not health insurance plans. HRAs give the employer control of benefits, while giving employees choice and a great benefit. With a stand-alone HRA, both employees and employers save money.
How to Create a Stand-Alone HRA Budget
As mentioned earlier, if the employer wants to contribute any amount to employees' health care costs, they can afford a stand-alone HRA. To budget for, and calculate the cost of the stand-alone HRA, follow three simple steps. We’ve provided an example of a stand-alone HRA budget for a 10-person company.
Step 1: Determine the monthly and annual health benefits budget
What is the overall budget you will contribute to employee health benefits?
For example, if your annual budget is $12,000 for employee health benefits, the monthly budget is $1,000.
Step 2: Back out Employees' HRA Allowance Amounts
Within the overall budget, set employees' allowance amounts.
For example, if the monthly health benefits budget is $1,000 and the business has 10 employees, employees' HRA allowances are $100/month.
Or, the business can customize the health benefits further with employee HRA classes. For example, a business can set different allowances by class of employee. Following the example of the 10-person company, they could allocate $150/month to the 2 managers and $88/month to the eight retail staff.
Tip: With HRA Software, the HRA allowances are notional, meaning the employer holds the HRA allowance funds until a reimbursement is due. You are not required to pre-fund the HRA allowances in third-party bank accounts, which frees up cash flow for the business.
Step 3: Adjust for HRA Software Fees
Factor in HRA Software administration fees. Fees will vary by provider and are usually a one-time set up fee and a monthly administration fee. As needed, adjust employee allowance amounts to stay within your overall budget.
What questions do you have about creating a stand-alone HRA budget? Leave a comment or question below.