Health insurance premiums are usually an employer’s highest expense after payroll. The staggering in-creases in premiums have made it very difficult for employers to afford to maintain health insurance for their employees. On June 26, 2002, the U.S. Treasury Department released its revenue ruling allowing Health Reimbursement Arrangements (HRAs). This allowed employers to us pretax dollars to fund accounts on behalf of employees for items such as unreimbursed medical expenses and insurance premiums; or to simply reimburse medical expenses not covered by their health plan (such as a high deductible or copay)
Who Can Establish an HRA Plan
Sole Proprietors, partnerships, regular corporations, S corporations, limited liability companies, professional corporations and 501(c)(3) not-for-profits can establish an HRA plan.
Individuals that cannot personally participate in an HRA include sole proprietors, partners, members of an LLC (in most cases), professional corporations, or individuals owning more than 2% of an S corporation. Although these specific owners cannot personally participate they can still sponsor an HRA and benefits from the write-off.
How Employers Utilize an HRA
An HRA allows an employer to save money on the cost of health insurance by raising deductibles, coinsurances and/or adding copays to the plan. Many employers use those savings to simply reimburse employees for the additional out-of-pocket expenses, making the change cost-neutral or providing them a reduction in their premium contribution. Reimbursements are not taxed to the employee and are deductible by the employer. In essence the employer is self insuring a portion of the health insurance plan.
Advantages to the Employer
The funds stay in the employer’s checkbook until an expense in incurred
The employer does not have to pay matching F.I.C.A and F.U.T.A taxes, disability and workers’ compensation insurance premiums on funds contributed to an HRA
Using an HRA helps control insurance costs by allowing the employer to lower benefits without affecting employee’s perception of coverage
The employer can determine what expenses are to be reimbursed and when
Funds can be used as incentives for wellness programs
All funds remain with the employer until a claim is incurred
HRAs remain with the originating employer and do not follow an employee to new employment.
HRA contributions and administrative costs are tax deductible
Unlike HSAs, any health plan can be used. This helps avoid the disruption of requiring prescriptions to be reimbursed only after deductibles are met (a requirement of HSAs)
Advantages to Employee
Reduced premiums usually mean reduced contributions
Employees direct their HRA dollars to pay for premiums (i.e. long term care insurance), deductibles, copays, or other qualified medical expenses determined allowable in the plan design
The possibility to have items that weren’t part of the plan reimbursed (all 213d items are eligible for reimbursement)
HRA payments are not taxable
Employees become more educated consumers because they are more aware of the cost of services and supplies
Unused funds can be used to pay for COBRA premiums after termination if allowed by the employer
Unused funds can be used to pay for Medicare premiums for retired employees if specified by the employer