by Tony Novak, CPA, MBA, MT revised on 4/7/2015
Prior to 2014, Healthcare Reimbursement Arrangements (HRAs) were the most cost effective way for a small business to provide health benefits to it's employees. Since the passage of tax regulations designed to promote implementation of the Affordable Care Act, HRAs are severely restricted both in availability as a strategy and the scope of benefits. HRAs are now used as a way for employers to provide health benefits above the coverage provided to an employee under the employer's group health insurance plan.
The employer purchases a group health insurance plans and then, in addition, adopts an HRA plan to provide benefits not covered by the insurance. The HRA plan typically allocates a uniform dollar amount for each employee. Only those employees enrolled in the group insurance are eligible for the HRA.
1) HRAs fill some of the holes in coverage left by today's health insurance policies.
2) Employees may more fully appreciate the value and flexibility of the cash benefits that are available to them through the HRA in comparison with the vague and less attainable benefits of the group insurance plan.
3) The HRA offers 100% coverage up to the stated plan limit of all medical, dental, eye care, preventative expenses and alternate health care without deductibles or co-payments.
4) There is no need to seek approval from a health insurance company.
5) Treatment may be obtained with any medical provider without the need to worry about a PPO list.
6) Unused benefits ma be carried over to the next year, providing a potential incentive to conserve medical benefits as well as serve as a built-in employment retention tool.
1) Some employees might not be able to afford the full cost of health care that is not provided by insurance, the HRA or supplemental insurance.
2) The Affordable Care Act restricts an employer's ability to provide health insurance outside of group insurance plans so there is less flexibility to use an HRA now as compared to years prior to 2014.
3) Some employees may drop the employer's group health insurance. For example, an employee might drop the group health insurance in order to receive free or subsidized health insurance through another plan and then be ineligible for HRA funds.
4) Current law requires that the employee be covered by the employer-provided group insurance as a condition of eligibility for HRA benefits. If is not possible, for example, for married spouses to be covered by one employer's group insurance and the other spouse's employer's HRA.
5) HRAs are subject to the maze of state and federal employee benefit plan rules. These rules are often complex. The cost of professional assistance with HRA plan compliance should be calculated into the decision to adapt a HRA plan.
6) If the business has long-term employees with unused carry-over balances in their HRA plan, this creates an unfunded liability account for the business. While this may be beneficial from an immediate cash flow perspective, the pros and cons of creating an unfunded legal liability should be seriously considered.
7) HRA plan benefit claims should be administered by a third party, not by an employee of the same firm. The potential liability for misuse of private medical information stemming from self-administered HRA plans makes this an imprudent risk in almost any business situation. Third party claim administration adds to the overall cost of HRA plans.
8) Tax law enforcement threatened by IRS to begin in July 2015 under IRS Notice 2015-17 increases the risk of large employer fines for non-compliant HRA plans. IRS says that the Service is aware of promoters who are illegally selling HRAs as an alternative to ACA compliance and so the Service plans to put an end to this practice after giving employers adequate notice.
HRAs lost popularity as an employee health benefit tool under 2014 tax law. Health Savings Accounts (HSA), Flexible Spending Accounts (FSA) and Cafeteria Benefit Plans (Section 125 plans) are the most likely alternatives. Freedom Benefits offers a small business health plan prototype plan at minimal cost (typically $150 for setup assistance) that allows a "mix and match" of all of these options.
The employer may provide (pay for) or make available (through salary deduction) supplemental health insurance to cover the risk of the high deductible insurance. These supplemental policies pay benefits without regard to other insurance. In other words, the benefits of supplemental insurance are available in replacement of other insurance benefits or in addition to other insurance benefits. In this regard, supplemental insurance is more flexible than primary health insurance or HRAs. More information is available at www.FreedomBenefits.net.
Other HRA articles:
(Some of these resources may not be updated to include changes triggered by ACA)
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Opinions expressed are the solely those of the author and do not represent the position of any other person, company or entity mentioned in the article. Information is from sources believed to be reliable but cannot be guaranteed. Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues or a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. Tony Novak operates as an independent adviser under the trademarks "Freedom Benefits", "OnlineAdviser" and "OnlineNavigator" but is not a representative, agent, broker, producer or navigator for any securities broker dealer firm, federal or state health insurance marketplace or qualified health plan carrier. He has no financial position in any stocks mentioned. Novak does work as an accountant, agent, adviser, writer, consultant, marketer, reviewer, endorser, producer, lead generator or referrer to other companies including the companies listed in the articles on this web site.