Health Reimbursement Arrangements (HRA) for small businesses; advantagess, disadvantages and alternatives

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Overview of Health Reimbursement Arrangements (HRA)

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. offers small businesses with assistance in the design, documentation and setup of these plans. The typical charge is $150 for small companies and the setup work can usually be completed in two telephone calls. Each covered employee requires about one hour of additional service work per year, mostly for communication about plan operations and claims processing.

How a Health Reimbursement Arrangement works

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.

Advantages of HRA plans

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.

Disadvantages of HRA plans

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.

Alternatives to HRAs

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


Other HRA articles:

(Some of these resources may not be updated to include changes triggered by ACA)

Carry-forward benefits in a Health Reimbursement Arrangement (HRA)

HRA plan design approved by IRS

HRA plan helps owner/employees

HRA plan overview

HRA plans for small businesses

HRA vs. HSA: Which is best for me?

IRS approves new HRA plan design

MSAs, HRAs and HSAs: which health plan is right for my small business

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