Insurance premiums have been significantly increasing year after year causing employers to either minimize benefits, decrease employer contributions, or even cancel the plan altogether. Companies with healthier employees often have low health insurance benefits utilization, leading to a low benefit to premium ratio. Health Reimbursement Arrangements (HRAs) take advantage of many employees not using their benefits, which allows employers to offer the most comprehensive coverage for the best price.
What Is A Health Reimbursement Arrangement?
An HRA is an employer-funded plan that is used to reimburse an employee’s Out-of-Pocket medical expenses. HRAs can be created when an employer enrolls in and funds a high deductible health plan (HDHP), they then use the HDHP to customize the benefits that are going to be offered to the employees. When using coverage, employees will first need to incur the medical expense, then request a reimbursement from the employer.
For some types of HRA plans, employers provide a preloaded HRA Debit Card to each member that is programmed to only be accepted for health related expenses. When the debit card runs out of funds, the member is responsible for paying the medical expenses until the Out-of-Pocket Max is met.
HRAs are different from a Health Savings Account (HSA) as HSAs are like a personal savings account with tax benefits; funds can either be saved, withdrawn for personal use, or used for medical expenses. HRAs are not accounts, so employees are not able to withdraw funds and use it to pay for their medical expenses. HRAs allow employers to contribute to employees’ medical expenses like HSAs without losing money on unused contributions.
First Dollar HRA Wrap Coverage
A First Dollar HRA plan is designed to reimburse expenses starting with the first dollar up to the allocated amount in the HRA account. This plan complements a higher deductible insurance plan, and helps pay for deductible items covered by insurance only. The First Dollar HRA strategy is a strong option for companies looking to either offer a bridge for a higher deductible health plan or a very rich plan covering most or all their employees’ insurance expenses.
HRA Wrap Strategy
By using an HRA Wrap Strategy, employers can customize employee benefits for a lower premium. There are plenty of HRA strategy options, as outlined below:
Traditional Coverage
- Employer will enroll in a high deductible fully insured plan
- Employees receive a normal medical plan with lower deductibles, co-insurance, and copays
Mix & Match Coverage
- Employer will enroll in a high deductible fully insured plan
- The HDHP will be used to create several plans for employees, such as a high-level plan and lower-level plan
Kaiser HMO Coverage
- Employer will enroll in a high deductible fully insured plan
- Employees are set up with debit cards to pay for their services at health facilities until the balance runs out
- Employees pay remaining amount of expenses until the Out-of-Pocket Max is met
When switching from a traditional insurance plan to an HRA plan, employers can save approximately 20 percent each year. By utilizing HRA plans, employers can offer employees competitive coverage at a discounted rate. Along with the discounted premium, another advantage that HRAs have is the ability to customize the plan to meet the employees’ preferences. Employers can create normal high-level plans with an HRA that is at a fraction of the cost.
The downside of using HRAs include the additional paperwork, cash flow issues, and eligibility limitations. Maintaining a traditional medical plan can already be a stressful time for businesses; adding an additional component to the benefits package can add an extra level of complexity.
Short term cash flow issues may arise in the event that all employees opt to use the employer’s contribution all at once; the amount allocated for HRAs needs to be ready to use. Another issue with HRAs is that they are not available to all businesses; partnerships, self-employed business owners, and members of LLCs are not able to enroll in HRA plans because of the way that the business is taxed.
Companies That Will Benefit From An HRA Wrap Strategy
HRA eligibility depends on the way that the business is taxed. Partnerships, s-corps, and sole proprietors are all taxed as the owner being self-employed, so they are unable to participate in an HRA plan. Corporations, such as c-corps and non-profits, are eligible to enroll in an HRA plan because the owner is taxed separately from the business, qualifying the owner as an employee.
Businesses taxed as c-corps, a legal entity taxed separate from the owner, are able to use HRA plans with no restrictions, giving the employees and the owner all the reimbursement and tax benefits that the arrangement offers.
Contact An Employee Benefits Consultant
HRA plans have many benefits that they can offer a business, but they also come with consequences. When choosing health coverage, HRAs can be a great option for employers and their employees because of the tax benefits and reduced premiums. For more information about HRA plans and how they can be effective, contact a professional employee benefits consultant at New City Insurance today.