In HRA or HSA? – Part 1 we discussed the HSA and how it works with a high-deductible health plan. In this post, we’ll take a look at health reimbursement arrangements (HRA) and how they can help your employees.
Unlike the HSA, a high-deductible health plan (HDHP) is not required in order to implement an HRA. It can be paired with any health insurance plan (or can be a stand-alone benefit). For instance, the employer may offer a health plan with a $1,000 deductible or a $10,000 deductible…it doesn’t matter. The employer determines what the HRA benefit will be.
Before going further, let’s take a look at an example of a typical HRA benefit in order to better understand how it might work:
An employer decides to offer its employees a major medical insurance plan with a $2,500 deductible. Let’s assume the prior plan had a $500 deductible. Because of the increased deductible the premiums are significantly reduced (we’ll use $50,000 for our example). The downside is the employees are now responsible for $2,500 instead of $500 in deductible expenses.
To offset the potential liability for the employee, the employer implements an HRA designed to cover the increased deductible. As one example, the HRA might be structuredto cover deductible expenses in excess of $500. If an employee incurs a deductible expense for $800, the HRA will reimburse $300.
Here’s how the employer saves: since many employeesdo not meet their deductibleduring the year (particularly if the plan has copays), the number of HRA claims is limited. Unlike an HSA, the employer only funds the account if the employee has an eligible expense, so all employees do not receive a contribution. In our example above, the employer saved $50,000 in annual premiums but may have only reimbursed $30,000 in incurred deductible expenses, a net savings of $20,000 from the prior year’s total expenses.
This is but one example of how an HRA can be used.If the employer doesn’t have a group health plan, an HRA can be put in place to help employees pay for medical expenses (see www.irs.gov/pub/irs-pdf/p502.pdf for a complete list of qualified medical expenses). An HRA can even be used to self-fund a dental plan.
The contributions employers make for qualified HRA claims are tax-deductible. In addition, the reimbursements are also excluded form employees’ gross income.
We looked at one specific example above, but the options for HRAs are unlimited. As an employer, you have the ability to help define what is best for both your employees and your company. Experienced third-party administrators can help you design the plan that best suits your needs.
Next time, we’ll do a comparison of HSAs and HRAs and give you the information you need to determine which plan is right for your company.