High-Deductible HRAs - A Way to Meet the Needs of Employees

June 11, 2020

A health reimbursement arrangement (HRA) is an IRS-approved, employer-funded, health benefit used to reimburse employees for out-of-pocket medical expenses and personal health insurance premiums. HRAs must be set up by an employer on behalf of its employees, and only the employer can contribute to an HRA.

HRAs became prevalent after June 2002, when the IRS issued a ruling to clarify their treatment in the tax code. There are a few different types of HRAs, but for employers offering a group health insurance plan, they'll most likely look into offering a group coverage HRA (GCHRA) which allows them to supplement out-of-pocket health expenses.

A way to encourage employees to adopt high-deductible insurance

There are a few instances where employees can benefit more from a high-deductible health insurance plan than they would from a low deductible plan.

Some of the benefits include:

  • An HDHP can be better for an organization because it may save thousands per employee on the premium for their group health plan.
  • An HDHP can be better for employees because they are more involved in their health care and make more informed spending decisions.
  • An HDHP can be better for employees that currently pay for a portion of their premium, because the employer can reduce the amount they pay.

Three reasons why all employees don’t choose high-deductible plans

Reason 1: fear for family members’ health

Many employees have received low or no-deductible health coverage from their employer their entire life. It will take time before some of these employees accept high-deductible health insurance despite the fact that they could save money immediately by switching to a high-deductible policy.

When it comes to healthcare, many healthy employees do not worry about developing an illness—they worry about themselves or a child having an accident costing thousands of dollars in medical expenses. This is one of the biggest reasons people don’t choose high-deductible health insurance, even when it could save them money.

Reason 2: fear of possible disease

Another reason people don’t choose money-saving high-deductible health insurance is the fear of a specific disease, like cancer, that may have affected a loved one/family member. Of course, cancer and many other diseases are covered by high-deductible plans, but employees sometimes feel less secure with them for emotional reasons.

Reason 3: fear of expenses

Another reason some people reject high-deductible coverage that would save them money is dental benefits—they simply don’t want to pay out-of-pocket dental expenses regardless of how much more it costs them in premium. This same is true for vision benefits and many other specific medical items.

The solution is a high-deductible HRA, also called a group coverage HRA, that offers first-dollar coverage for IRS-approved items. Employees incur these expenses and submit their receipts for reimbursement.

How high-deductible HRAs can save employers money

Let’s assume the current annual deductible on a group plan is $1,000 and the employer wants to raise this deductible to $5,800 so their employees can qualify for HSAs and make the maximum HSA contributions. The insurance carrier would probably lower the group premium for this large of an increase in their deductible.

To make this change acceptable to the employees, the employer offers each employee a $1,000 per year high-deductible HRA in combination with the new high-deductible health plan. The group coverage HRA pays 100 percent of all medical expenses up to $1,000 a year, with unspent amounts carried forward for future years.

For the employees that consume less than $1,000 a year in healthcare—these employees would immediately get up to $1,000 a year improvement in their health benefits, and the company would save $500 in health premiums plus any unspent HRA amounts. Among the remaining employees who consume more than $1,000 a year on healthcare, those who consume $1,000 to $2,000 would also benefit, while those who consume $2,000 to $5,800 in healthcare would have out-of-pocket expenses up to a maximum of $3,800.

Pairing a high deductible health plan with an HRA has a number of advantages for an employee. PeopleKeep offers the ability for employers to further supplement their HDHPs for employees’ out-of-pocket expenses, tax-free using a group coverage HRA, or integrated HRA.

Is a group coverage HRA right for your organization?Reach out to a personalized benefits advisor for a free consultation

Wondering how you can help your employees pay for health insurance.
Learn more about the small business HRA.