The list of ways employers can use HRAs (or Health Reimbursement Arrangements) to improve benefits and lower health plan costs grows every day. HRAs are the future of employer-sponsored health insurance; they are one of the only employee-benefits vehicle allowed to reimburse premiums on individual health insurance and are therefore a critical part of any defined contribution health plan. In this post, we examine five uses of HRAs and then summarize how HRAs work so you can design the best customized HRA programs for your business and employees.
Five Ways to Use HRAs
- Defined Contribution HRA. The HRA becomes the entire employer health benefits plan. Employees purchase their own individual health insurance, and seek reimbursement for the premium from the HRA 100% tax-free.
- New-employee HRA. Provides health insurance coverage from first day of hire until employees become eligible for regular health benefits.
- Retiree HRA. Provides an extended and less expensive alternative to COBRA health insurance, and can help older employees with early retirement.
- High-deductible HRA. Encourages employees to choose high-deductible health insurance and incentivizes smart shopping (i.e., buying generics, medical shopping).
- Supplemental HRA. Fills the gaps that some group and individual plans do not cover (e.g., accidents, maternity).
TIP: Whether your company has a traditional employer-sponsored (defined benefit) group health plan or a defined contribution health plan, HRA programs can save companies and their employees thousands each year—from the day they are first hired until years after they are retired. The new-employee HRA program alone may save employers with a group health plan $2,500 per single and $7,500 per family on every new person they hire.
How HRAs Work
In the early 2000s, the IRS began allowing employers to establish HRAs to reimburse employees tax-free for certain medical expenses, including premiums paid for individual health insurance—similar to the way employers routinely reimburse employees for travel, meals, and other qualified business expenses. Employees incur medical expenses and then submit documentation for reimbursement in accordance with the rules of the specific HRA.
HRAs are sometimes called Section 105 plans after the IRS Code section that governs them. HRAs represent the future of employer-sponsored health benefits because they are so flexible and allow employers to reimburse employees for premiums on individual and short-term health insurance.
Basic Rules and Uses for HRAs Today
- HRAs must be 100 percent funded by employers and cannot be funded by employees through salary reduction.
- HRAs can be either “use it or lose it” or “use it or keep it”—whichever the employer chooses to offer for each HRA.
- HRAs can generally be used to cover everything an FSA or HSA can cover (i.e.: virtually all medical and pharmacy expenses) plus:
- Individual health insurance premiums
- Medicare and long-term-care insurance premiums
- Preventive care such as weight loss and smoking cessation
- A wider list of medical expenses like over-the-counter medicines
TIP: The main reason employers use HRAs today is to get employees to accept changes to the group health plans (i.e., higher deductibles or exclusions for certain items) that result in significant reductions in the premium paid for employer-sponsored group health insurance.
How to Set Up an HRA
When it comes to funding employee medical expenses tax-free, HRAs offer the most flexibility in plan design.
The company can have an unlimited number of HRAs or one HRA for all HRA-type benefits. There is no legal entity to set up—to establish an HRA an employer writes a Plan Document and a Summary of Plan Description (SPD) that clearly states what employees are entitled to under the HRA.
TIP: An Employer does not need to spend thousands or more for a lawyer to write these documents. An HRA administrator should be able to provide the documents needed for a one-time setup fee of $1,000 or less.
Unlike with an HSA, the IRS requires employees to submit written documentation for all eligible medical expenses before they are reimbursed from the HRA. However, because of HIPAA and other privacy concerns, virtually all companies use a third-party to handle verification of medical expenses and/or reimbursement to employees.
HRAs are the newest tool to improve the health of employees and save employers and employees money on health benefits. They are deliberately designed to be easy to use and flexible enough to allow innovation in health care.
5 Step Setup for a Defined Contribution HRA
Step 1 – The Employer sets employee eligibility requirements, decides what expenses are eligible for reimbursement, and determines the monthly or annual HRA contribution amounts.
Step 2 – The Employer enrolls Employees into the plan and distributes IRS/ERISA/ACA required plan documents, SPDs and notices to each eligible Employee.
Step 3 – Each Employee chooses and pays for his or her own individual health insurance policy and submits proper documentation for reimbursement.
Step 4 – A HIPAA-compliant claims processor reviews the reimbursement request and approves or rejects the request.
Step 5 – If the request is approved, the Employer reimburses the Employee for the approved reimbursement up to the balance of each Empoyee’s HRA.
Optional: Additional HRAs may be included to vary the benefits by HRA employee classes.