Health Reimbursement Arrangements (HRA)

The largest companies have self-insured medical plans because it saves them money and gives them more control over their health insurance.  Large companies know that cutting out the insurance company middle man will benefit them.  Smaller employers can take advantage of this large group strategy by implementing a Health Reimbursment Arrangement, or HRA, into their employee benefit package.​

What are they
At some point in time an employer will determine, with the help of an experienced agent, that it make sense to start reimbursing employees directly for medical claims instead of paying an insurance company to do it.  It’s important to know that HRA’s are for small claims, not for large catastrophic claims, so the employer is always protected from catastrophic loss. The employer will offer a benefit that each employee can use to pay for qualified medical expenses.  The IRS sets forth a comprehensive list of approved expenses and the employer can choose which procedures to cover and which will be declined.  The employer chooses how much money to put in the HRA each year, for instance $2,400 for each employee.  Once these rules are set forth, the plan will begin and the employees can be reimbursed for medical expenses, and the benefit each employee receives through the HRA is not counted as taxable income.  Any unused funds left in the HRA at the end of the year belong to the employer and are usually returned to the business general fund.

How they work
Say for example that a company spends $10,000 per month on health insurance.  Usually, to implement an HRA, the employer would want to reduce their health insurance costs, ideally by 30-50%. So now, the company chooses a plan that only costs $6,000 per month, saving the company $4,000 each month, or $48,000 annually.  The employer would then take those premium savings, the $4,000 per month, and put them into an HRA.  The HRA would pay for employee claims.  Each employee uses a debit card to access the HRA and pay for medical expenses.  Because lots of claims data has been compiled by insurance underwriters and third party claims administrators, the employer can fairly accurately predict how much will be paid from the HRA each year, roughly 50% of total HRA funding. So the employer can expect that, on average, a reserve of $24,000 will remain in the HRA account at the end of the year. So for our example, an employer paying $120,000 per year in health insurance costs can expect to save $24,000 or 20%.

Why they work
 
    1. Third Party Administrators
The employer doesn’t need to lift a finger to implement an HRA; they will hire an outside company to setup and manage the entire program.  These companies are called Third Party Administrators, or TPA’s. The TPA company will help design the plan and limit risk for the employer.  Proper documentation is created and distributed to the employees.  The TPA company uses specialized software that provides each employee with their own debit card, mobile app, and HRA account.  The employer can login periodically to view claims reports and see how things are going. The TPA company will make sure the employer is following HIPAA and ERISA law while also maintaining compliance with ACA regulations.

    2. Savings and Control
HRAs give the employer the best odds of reducing employee benefits costs. Once a successful medical HRA program is created, the concept can also be used on dental and vision as well.  Employers “own” their HRA program so they can decide how much money to contribute, and which claims to reimburse.  This allows the employer to really target their benefits dollars toward the most important benefits for their employees.

    3. Better Benefits for the employee
Using traditional health insurance, employees will always have to pay out-of-pocket first before the insurance company pays their claim.  Things like co-pays, deductibles, and co-insurance mean that the employee is always spending money to use their insurance.  But unlike traditional health insurance, the employe can use HRA funds to pay for those common out-of-pocket expenses and wont be forced to pay anything until their HRA funds are exhausted.

What holds HRA’s back
With its many advantages, HRA’s have struggled to grow in popularity due to two main factors:

1. Insurance agents make less money when their clients use HRA’s so they are hesitant to promote them and less than enthusiastic to educate their clients on the benefits of these programs.
2. Because the HRA is unique and uncommon, many employees struggle to understand exactly how their HRA works why it may be better for them.  Employee education is crucial to the longevity and success of any HRA program.

Summary
These obstacles haven’t deterred thousands of small business from implementing and benefiting from their own HRA program.  Insurance Savings Group is a third party administrator that offers robust HRA programs along side many other unique health plan options.  If you would like more education on HRA’s, or would like to see an HRA proposal for your company, please contact Insurance Savings Group.