Health Reimbursement Arrangements (HRAs) are plans designed to help both employers and employees lower health care costs.
Allowed under sections 105 and 106 of the Internal Revenue Code, they enable employers to reimburse employees for out-of-pocket medical expenses not covered by insurance and are often combined with high-deductible health plan coverage.
“Employers benefit from offering HRAs by reducing insurance costs and restructuring health benefits,” says Ron Filice, president and CEO at Filice Insurance. “By moving employees to high-deductible health plans, costs are more predictable and controlled as employees are encouraged to become better health care consumers.”
HRAs allow employees to use employer contributions only for qualified medical expenses.
Smart Business spoke with Filice about how HRAs work and how they can be a first step toward the decision to become self-insured.
What are HRAs and how do they work?
HRAs are employer-paid health care arrangements that are often paired with high-deductible health plans to lower health care costs.
Typically, an employer creates an unfunded HRA account for each participating employee and reimburses the employee up to the HRA’s account balance for substantiated medical expenses not covered by insurance, such as insurance premiums, deductibles and copayments.
If an employer chooses to offer an HRA, it establishes eligibility rules, a maximum reimbursement amount and a list of eligible expenses. The list must comply with section 213(d) medical expenses as defined in the Internal Revenue Code. After incurring medical expenses, employees submit claims to the HRA administrator for reimbursement. For employers, all HRA reimbursements are tax-deductible.
For employees, contribution amounts made by employers are tax free and reimbursements for medical expenses are also tax free. Employees also benefit from the protection HRAs provide against catastrophic medical costs.
Can these funds be carried over from year to year?
HRA funds can be used to cover a wide range of health care expenses, but unlike flexible health spending accounts, HRAs can be designed to allow funds to be carried over year to year. However, unused HRA amounts may not be cashed out — only carried over to the following year.
Also, employers may establish account caps on total HRA account balances and include rollover maximums on carryover balances.
How can HRAs save money for employers?
Take the example of a group that has 150 employees and 201 covered dependents. The total annual premium for that group with a $250 deductible would equal a little more than $259,000.
If you increase the deductible to $1,000, the HRA reimburses employees for the additional $750 out-of-pocket costs.
If you just look at the premium, it drops to about $61,500 with the higher deductible, a savings of nearly $198,000 with the new plan. If 225 people satisfy the $1,000 deductible, the reimbursement cost comes out to $168,750.
When you subtract this from the premium savings, you get a net annual savings of $29,000.
How can they act as a first step toward becoming a self-insured plan?
The goal of an HRA is to lower health care costs, but it also allows the employer the opportunity to set ground rules as to how the plan will function.
In that way, similarities can be drawn with going self-insured, when a company manages its own coverage and bears 100 percent of the risk when it comes to claims.
Insurance brokers will often encourage groups with a couple hundred employees to try an HRA before going self-insured to get an idea of the claims being paid. How much are those claims and what are they for? If you can find a comfort level at the HRA stage, you may want to look at going self-insured. ●
Insights Insurance is brought to you by Filice Insurance.