Every once in awhile I get a question from an employer about HRAs, or Health Reimbursement Arrangements. What are they? How do they work? Is this something I can use to reduce my healthcare costs? If you’re running a small business or strategizing how to keep healthcare costs in check, continue reading to discover how you might embrace HRAs as a benefit option.
As an employer, a Health Reimbursement Arrangement is established as a defined contribution benefits plan for your employees. Each year as an employer, you decide upon a defined contribution benefit of pre-tax dollars made available to your employees for medical expenses. The HRA is totally funded by the employer and any unused funds revert back to the employer at the end of the year.
Small employers typically select an HDHP (High Deductible Health Plan) to be used in conjunction with the HRA which brings the initial cost savings to the table. Premiums for a HDHP can be as much as 20% less than richer plans.
Let’s assume a $4000 deductible plan is selected.
You have 20 employees and the monthly cost of insurance is $500/month X 20 = $10,000/monthly X 12 months = $120,000 annually.
Had you selected a $1000 deductible plan, your annual costs would have been at least $700 or $168,000 annually -difference of $48,000.
By setting a defined contribution amount of $3,000, the employee pays the first $1000 of copays and deductibles then has the HRA available for future out of pocket expenses. While utilization will vary from year to year, most actuarial experiences will indicate that only about 50% or less of the defined contributions are used each year. This can equate to a significant savings in net healthcare costs.
Along with the savings in the example above, any defined contributions utilized are 100% tax deductible to the employer. Payments made on behalf of the employee also do not count towards taxable income. Any funds not utilized by employees revert back to the employer at the end of the period.
The above is only one of many different HRA designs that can be used. IRS Publication 969 provides a great deal more info on this topic.
HRAs faded with the advent of other Health Savings Account vehicles, but with the ACA’s higher deductibles and other changes in health care law, they are experiencing refreshed interest. For more info, contact your broker or send your questions to firstname.lastname@example.org.
If you’re running a small business and would like to see where your benefits stack up, join us on January 18th for a webinar on benchmarking. Register here.