As small employers evaluate how to offer employees a valuable health benefit, they will likely consider a stand-alone Health Reimbursement Arrangement (HRA). Stand-alone HRAs are an IRS-approved benefit that allows employers to provide employees with tax-free contributions to their individual health insurance premiums and out-of pocket medical expenses. With a stand-alone HRA, employers offer employees a "business expense" type of health benefit, as an alternative to a traditional group health insurance plan. Stand-alone HRAs are also sometimes referred to as "pure" defined contribution plans.
So, what are the pros and cons of stand-alone HRAs for an organization and it's employees?
Stand-alone HRAs: pros for small to medium sized employers
The four main pros of stand-alone HRAs for small businesses are: flexibility, employer control, tax savings, and employee recruitment and retention.
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Flexibility: First, stand-alone HRAs are an extremely flexible benefit. An employer or organization can design the HRA in a variety of ways to meet their budget and hiring needs. For example, the business decides the amount to contribute to employees' HRA allowances, what types of medical expenses to reimburse, and what happens to the funds at the end of the year. In other words, with certain HRA plan designs, virtually anything goes.
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Control: With stand-alone HRAs, the employer owns the HRA funds and the HRA is entirely employer-funded. HRA reimbursements are only issued to employees once they show proof of the expense. Additionally, when the employee leaves the business, any unused HRA funds stay with the business.
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Tax savings: Stand-alone HRAs reduce the amount of FICA and FUTA tax. Employers can deduct HRA reimbursements as a business expense, and exclude them from wages subject to FUTA (0.8%) and the employer portion of FICA (7.65%).
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Recruitment & retention: Many small to medium businesses struggle to afford group health insurance, or cannot meet participation requirements. Offering a stand-alone HRA as the sole employee health benefit allows a small business to offer (and advertise) health benefits when recruiting key employees.
Stand-alone HRAs: pros for employees
The five main pros of stand-alone HRAs for employees are: the benefits of pre-tax dollars, choice of plans, plan portability, plan value, and federal premium tax subsidies.
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Pre-tax dollars: Employees save 20-40% on medical expenses by using pre-tax dollars rather than after-tax dollars. And, HRA reimbursements from are generally excluded from employees' gross income.
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Choice of insurance plan: With a stand-alone HRA, employees choose the individual health insurance plan best for them. Employees can choose from any carrier, and any type of plan (HMO, PPO, HDHP, etc.). Additionally, employees can use the HRA to cover the cost of supplemental coverage like dental or vision insurance, or other qualified medical expenses, with pre-tax dollars.
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Insurance plan portability: With stand-alone HRAs, employees are purchasing individual health insurance plans. Since individual health insurance plans belong to the employee (not to the employer), the plan stays with employees if they leave they leave the organization.
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Less expensive insurance policies: In general, the cost of individual/family health insurance premiums costs a third the price for similar group coverage.
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Federal individual premium tax subsidies: Since 2014, most employees have had access to significant premium tax subsidies through their state health insurance marketplace. An employee is eligible if their household income is less than 400% above the federal poverty line ($49,960 per year for a single person and $103,000 per year for a family of 4 in 2020).
Stand-alone HRAs: cons for small to medium sized employers
So, what about the cons of stand-alone HRAs?
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A change in benefits administration: Offering a stand-alone HRA changes the role of offering health benefits from a plan management role to a payroll function. Some employers perceive HRA administration as a con of offering an HRA. With the wrong HRA administrator this can be the case. What's the solution? Using an HRA software provider can completely alleviate administration burdens. With the right HRA software, HRA administration generally takes less than 10 minutes a month.
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Limited tax-benefits for some owners: With stand-alone HRAs, some types of business owners receive limited tax benefits from HRA reimbursements. In other words, some business owners may need to report HRA reimbursements as taxable income.
Stand-alone HRAs: cons for employees
Likewise, there are some perceived cons for employees with stand-alone HRAs. With planning, education, and the right HRA administrator, these concerns can be addressed:
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Reimbursements are just that: With a stand-alone HRA, employees must show proof of their insurance premium and medical bills before being reimbursed. To significantly alleviate this, employers should use HRA software that provides same-day processing of employees' HRA reimbursement requests ("claims").
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Change is hard: A stand-alone HRA is a significant change in how employers offer health benefits, and how employees receive them. Even with all of the employee benefits listed above, it still means employees take on a new responsibility of managing their own health benefits. Employees become health insurance consumers (just like they are a car insurance consumers). What makes all the difference? Work with an insurance broker to help employees choose individual health insurance policies, and choose an HRA administrator that will help educate, train, and support employees on the stand-alone HRA.
