As an employer considering a health benefit, you may be deciding between traditional group health insurance and a healthcare reimbursement plan, like a health reimbursement arrangement (HRA). How do you know which is the best fit for your company?
Despite the increasing popularity of HRAs, which feature several benefits like more personalization, cost savings, and tax advantages, you may be hesitant to accept it as a new benefit due to some common misconceptions.
In this article, we’ll break down common HRA myths that will help you better understand how an HRA can serve as an affordable and flexible health benefit for you and your employees.
Searching for a specific myth? Skip ahead below!
- Myth 1: HRAs don’t qualify as a real health benefit
- Myth 2: HRAs cost more than traditional group insurance
- Myth 3: HRAs won’t satisfy the ACA’s employer mandate
- Myth 4: An HRA won’t cover the healthcare services that employees need
- Myth 5: HRA expense reimbursements are subject to taxes
Myth 1: HRAs don’t qualify as a real health benefit
Some employers think because they haven’t heard of an HRA then it must not be a formal health benefit, but this couldn’t be further from the truth. An HRA is an IRS-approved, employer-funded health plan where employees are reimbursed for qualified medical expenses up to a fixed annual dollar amount.
With a qualified small employer HRA (QSEHRA) or an individual coverage HRA (ICHRA), employees choose the individual health insurance plan that works best for them and employers reimburse them for the premiums instead of offering a group health plan.
With a group coverage HRA, also known as an integrated HRA, employers can supplement their group health insurance plan to help their employees pay their deductibles, copays, and other out-of-pocket costs.
With all HRAs, you are required to follow IRS regulations to ensure your health benefit stays in compliance with the law.
Myth 2: HRAs cost more than traditional group insurance
Many employers find traditional group benefits difficult to offer because of their high and often unpredictable costs. By contrast, HRAs are a cost-effective way to offer health benefits to employees, providing more value for less money than group health insurance. HRAs typically cost employers less while covering a greater percentage of their employees’ overall medical expenses.
In addition, HRAs have a fixed cost—unlike group health insurance plans that are often subject to significant annual rate hikes. When designing your HRA benefit, you pick a monthly allowance to reimburse your employee for their healthcare expenses. Once an allowance is determined, employees can’t go over the maximum amount. Plus, any unused allowance stays with you, so you only reimburse what your employees actually use.
Myth 3: HRAs won’t satisfy the ACA’s employer mandate
The Affordable Care Act’s (ACA) employer mandate requires applicable large employers (ALEs) to offer their full-time employees and their dependents health insurance that is affordable and meets minimum essential coverage (MEC). If they don’t, they may be subject to employer mandate penalties in the form of payments under the employer shared responsibility provisions (ESPR).
Many employers assume traditional group health plans are the only form of health insurance that satisfies this mandate, but this isn’t the case. The ICHRA can satisfy the employer mandate requirements for large employers as long as their contributions are affordable.
An affordable ICHRA contribution ensures the cost of health insurance for an employee isn’t more than 9.61% of their monthly household income, using the lowest-cost silver plan on their local exchange as the standard.
Myth 4: An HRA won’t cover the healthcare services that employees need
From aspirin to counseling, to x-rays and physical checkups, the number of eligible items an HRA can reimburse can be truly surprising to some. With a QSEHRA and ICHRA, employees can even use their HRA funds to get reimbursed for their individual insurance premiums. A full list of the 200+ reimbursable expenses is listed in IRS Publication 502, though the employer can make restrictions to this list if they choose.
After incurring a qualified expense, employees submit proof of the incurred expense usually in the form of an invoice or receipt. Once it’s verified, the employee is reimbursed up to their monthly allowance amount.
Myth 5: HRA expense reimbursements are subject to taxes
One of the biggest questions employers wonder is if an HRA is taxable. Unlike other plans, the money reimbursed through the HRA is not subject to federal or state income taxes. Contributions, accumulation, and reimbursements are all tax-free for the employer.
What’s more, HRA reimbursements are also tax-free for employees as long as they’re covered by a policy that meets MEC.
Implementing any type of health benefit is usually met with a mix of interest and hesitation. Many employers offer an HRA to save on taxes, control their budget, and help their employees offset medical expenses. And because HRAs can be customized to suit the needs of both the employer and the employees, it’s one of the most flexible types of health benefits plans.
If you’re interested in an HRA for your business, PeopleKeep can help! Schedule a call with one of our personalized benefits advisors and we will get you on your way.