In prior articles, we have gone into a significant amount of detail on the various types of spending accounts. See part 1 here. In this article, we will talk about another three-letter acronym that people often get confused about in this space: Health Reimbursement Arrangement (HRAs for short).
We have broken this article into two parts. In the first part, we will explain what an HRA is and the financial risks involved. Stay tuned for part two, where we discuss Qualified Small Employer HRA’s (QSEHRA’s) versus Individual Coverage HRA’s (ICHRA’s).
Let’s talk about HRAs this month. An HRA is referred to as a Health Reimbursement Arrangement. And just like with the spending accounts, there are several versions of HRAs.
The biggest thing I hope everyone takes away from this article is this – A reimbursement account is just that. You are being reimbursed because you have done something or experienced something that triggered that reimbursement (i.e., a payment from your employer to you).
The R in HRA stands for reimbursement, and this money is from the employer. These accounts are not employee funded. Employers often use them to help employees offset claims or to reimburse employees for items their group plan may not cover. In some cases, they might be offered without a group plan altogether.
Furthermore, let’s start with the most common and, in my opinion, underutilized HRA, which is your typical Health Reimbursement Arrangement (HRA).
Health Reimbursement Arrangement (HRA)
Several clients use these to help employees pay increased costs they have experienced on the claims side, most often due to plan changes at the health insurance level.
Let’s break it down.
Let’s say you are an employer with a $2K / 80% copay plan. You get your regular 12% increase from your health insurance provider, but then at the same time, your broker tells you that you could make a move to the same plan but with a higher deductible (let’s say a $5k / 80% plan), and that in making that move, your rates would go down by 5%. From a financial standpoint for the business, it probably sounds like a heck of a deal, BUT if you have a bunch of hourly employees who make $10 – $15 an hour, that $3K adjustment to what they might owe if something major happens might be a bit scary.
Well, have no fear. Here comes the HRA!
With a Health Reimbursement Arrangement, one of the things that I appreciate about them is that it leaves the employer the ability to get creative, so let’s talk about a few things you could do in this scenario.
Here Are Some Basic Approaches to Follow
Example 1: Keep the employee whole. The employee pays the first $2k of the $5K deductible, then the HRA pays that last $3K. This would probably work best for the employee, but after the first 2K, there’s no incentive from $2001 – $4999 for the employee to spend conservatively since all that money would be reimbursed by the HRA (aka by their employer).
A smarter approach might be the following:
Example 2: Instead of paying 100% of the costs in the $2K-$5k range, you set up the HRA to pay 80% of the costs in that same space. It will feel the same to the employees as in example #1, all the while limiting the amount the company has to pay (while keeping some skin in the game at the employee level). In this instance, instead of a $3K liability per employee enrolled, the employer / HRA is only subject to $2400 of liability.
Again, the thing I like about HRA’s is they can be set up however an employer would like. You could take the above examples and make additional payments available for family members or choose to have one overall payment available per household. Did you have to set up a pharmacy deductible or a higher ER copay with your plan? You could have the HRA help with those as well.
A couple of things to remember: in this type of situation, your HRA will be tied to your health plan, so those who opt out of the health plan are also, by default, opting out of their HRA.
The Financial Risk of HRAs
When implementing this program, you want to look at the additional financial risk you are putting on your company and figure out what additional costs the company will incur. Here are a couple of things to consider.
First, you will want a third-party administrator to manage the program and pay these claims. This is not something you want to have to mess with. Like all things benefits, legal plan docs are required, and HIPPA is involved due to the claims information you would have visibility to, so at a minimum, there will be a small monthly admin fee to manage the plan, plus whatever claims are paid each month.
I recommend looking at a few different scenarios to figure out costs. Figure out what the worse case is. Calculate that number if you have an HRA that can pay out a max of $3K per employee. That should not happen, but if it did, you would be obligated to pay those claims and reimburse your employees per the contract.
Second, look at your claims reports and see if you can identify trends for your population. If, over the last five years, you’re seeing three people per year hit their deductibles, then use $3k x 3 to figure out your expected company liability. This is the number you would more than likely have to pay out.
Third (and this is your best-case scenario) would be that you only pay your annual admin costs with no claims paid. That probably won’t happen, but it will give you an idea of your pure administrative / fixed costs.
With those three numbers identified, you will want to compare those back to the savings you are generating on your health plan from making the change. There still should be a good amount of savings in at least 2 of the three scenarios for this to make sense.
Also, don’t forget about dental and vision. If you don’t have dental or vision plans, you can also reimburse employees for claims associated with these items through an HRA. Sometimes, this can make more sense than paying for insurance programs.
Breakdown of an HRA
Here’s the breakdown of an HRA, similar to what we did before with the savings accounts (for consistency’s sake, of course):
Items allowed to be paid
Whatever the business owner’s little heart desires! You just need to be specific. Reimbursements are often tied to increased exposures at the employee level or claims not covered by insurance.
Immediate Max Payout?
Potentially, the reimbursements are triggered by claims, so if someone had a major claim on the health insurance side on the first day of the policy year, that could trigger a reimbursement to be paid by the employer. Still, there’s usually a 2 to 4-week delay as claims typically need to be processed by the major medical insurer first, then the reimbursements go out.
Maximums Contributions Allowed
The employer only sets this up with employer funds, with no employee funding. Business owners should be conservative here and look at overall total exposures generated by the HRA and your expected reimbursements. In going this route, you’ll have some years better than the last, but you should ALWAYS be in a better place thanks to the savings you are generating. Otherwise, this just doesn’t make sense.
Immediate Tax Benefits
No. There is only an employer expense here if claims are paid, but if you set this benefit up but nobody ever uses it, the business has nothing to write off, so no business expenses or tax savings are generated.
There are no tax benefits for employees, but in most cases, the reimbursements are also not treated as income, so no additional taxation is generated. This could be different for high-income earners/business owners. CPAs are your best friend if you’re at that level.
Who is it funded by?
Employers.
What are the “gotchas”?
There are 2. Both have been touched on previously but to reiterate:
- Benefits typically don’t roll over; it’s only a portion when they do.
- Generally, specific time frames are allowed to get claims filed and reimbursed, so if that is the case and you have had a claim that allows for a reimbursement, file your claim! What are you waiting for?
Do You Still Have Questions About Health Reimbursement Arrangement? We Are Here to Help!
We hope that you now have a better understanding of HRA’s, and as always, if you have any questions, please do not hesitate to reach out to us for more information. We are always happy to help!
Stay tuned for part 2, where we discuss the difference between Qualified Small Employer HRA’s (QSEHRA’s) and Individual Coverage HRA’s (ICHRA’s)!
