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Blog by: Michael Sheeran, CFP

A Health Reimbursement Arrangement (HRA), can be one of the most effective ways to save money on your group health insurance premiums. In fact, some companies can save upwards of 30% over traditional plan setups. Despite the potential savings, there can be some drawbacks of a HRA and things to be aware of before making the jump.

As a reminder, a HRA is a strategy that employers can use to reimburse employees, tax-free, for medical services. The usual setup is to purchase a high deductible health plan and then reimburse employees for medical services as they are incurred.

HRA Example:

To illustrate how this would work, imagine a company with ten employees and an annual premium of $100,000 on a platinum plan. In setting up the HRA strategy, they purchase a lower-cost Bronze plan for $60,000 annual premium reducing the premium by $40,000. Each employee has an upfront deductible of $2,500 on the new plan and the employer has agreed to reimburse each employee the whole deductible if they have any claims. They will use a third-party administrator (TPA) to set everything up and employees will work with the TPA to submit their claims and get reimbursed. At this point, the employer has saved $40,000 in premium and has agreed to fund up to $25,000 in healthcare expenses for their employees. Their worst-case scenario is saving at least 15% over their current platinum plan.

HRA’s are a great deal for most employers, but there are some things to consider before taking advantage of this strategy. Please read on for the tips below.

Potential Disadvantages to Using Health Reimbursement Account

1) HRA Plan Setup

The first potential issue is actually setting up the HRA plan properly. I don’t recommend any small company doing this on their own so you must seek out a third-party administrator to handle claims and handle the plan document setup. The typical charge for these services may be around $1,000 – $2,000 per year for a small business. That being said, if you only have 2-3 employees, the extra cost may wash away any potential savings.

The administrator will handle plan documents, non-discrimination testing and all other services to make sure your plan is set up properly according to the IRS guidelines.

2) Substantiation Requirements

The IRS has strict rules regarding anything that has potential tax savings, so you must substantiate every claim that gets reimbursed to your employees. That means you must have a receipt and/or explanation of benefits (EOB) for every claim to prove it was a qualified medical expense under the plan. This is where the TPA comes in. They will review each claim as they are submitted, and make sure everything matches up before reimbursing your employees.

3) Additional paperwork and ID Cards

Since this is technically another health insurance plan, there will be extra enrollment forms and possibly debit cards that can be used to pay for claims. (TPA’s will often issue debit cards that employees can use to pay for their medical services). More forms and cards mean a little more work for everyone, but nothing to be too concerned about. The HRA can be set up so that claims are approved at point of service with a debit card, or after the fact with manual claims submission. Getting the approval on the back end is better for the employer, but sometimes employees will be asked to pay for a large surgery upfront and may be waiting for the reimbursement for a period of time. There are ways around this, but it is something to consider. When using the debit card option, there is always a possibility it is used for a medical service you may not want to reimburse for. An example would be corrective lenses. It is a medical expense so the debit card will approve the transaction, but you may not want that to be part of the HRA. Once the TPA audits the claim, they will require the employee to pay the plan back since it was an unauthorized transaction. It can be a nuisance when this happens but thankfully it’s pretty uncommon.

4) First year claims exposure

HRA plans will usually run calendar year regardless of what your underlying health insurance is. This is because most health plans have deductibles that reset every January 1.

Example:

-Health Plan renews every July 1 for your company – you also decide to start the HRA July 1 this year

-HRA year 1, will run July 1 to Dec 31.

-HRA year 2, will run Jan 1 to Jan 31.

Why does this matter? If we go to my original example, you had pledged $2,500 per employee per year. This means you pledged that amount from July through the end of December and then it will refresh on January 1 with a new pot of money for everyone. This happens at the same time their deductibles reset.  So for this first year, there is a potential for higher HRA usage than later because of the short year leading into January 1. You can work around this and update the plan documents if need be, but it is something to keep in mind.

***HRA Plans can be discontinued under a worst-case scenario

5) Cash Flow Issues

If you have decided to fund an employee’s full deductible or pay the first $1,000 or whatever the amount is, you have to make sure the money will be available when needed. If you start the plan on July 1, there is always the chance that a large amount of your employees are going to need the money right away. With the lower premium plan, your savings will accumulate over time, but under this scenario, you may end up paying more during the first few months and recapture the savings later in the year.

6) Employee Complaints

Using an HRA will be a different experience for everyone so you are bound to get some complaints. This is normal for almost all plans, but anytime you ask employees to do more paperwork, there is always the potential for some push back. This is where a good broker and TPA are important. We can lighten the load for the employer and handle situations that come up. Once the plan has been active for some time, most employees are very grateful for the reimbursements and they have lower out-of-pocket compared to before.

7) Eligible Employees

Unfortunately, self-employed business owners, partners in partnerships, members of LLC’s and 2% shareholders of S-Corporations may not participate in the HRA. ****At least on a tax-free basis – speak to your accountant for specific rules. I am able to help business owners participate in other tax-advantaged vehicles like health savings accounts though, so all is not lost.

Despite the potential issues, I feel every small employer should consider using an HRA for their health insurance and employee benefits programs. We have seen many of our group clients save tens of thousands each year in premiums by using this strategy. If you would like to schedule a consultation to review your plan, please reach out to me at msheeran@glenninsurance.com