This is absolutely the cheapest way to provide a health benefit plan for a small business.
The strategy described below is currently practical for small business health insurance groups with less than 10 employees, but by 2014, all small groups with less than 50 employees will be able to use it.
By reimbursing your employees for individual health insurance premiums instead of purchasing more expensive group health insurance, you should be able to cut your health insurance cost in half. Employees end up with less expensive, permanent coverage that they can take with them when they leave your employment.
With the passing of the Affordable Care Act (ACA), the number of small groups using this strategy is rapidly increasing because employees with pre-existing conditions can now join the California Preexisting Conditions Insurance Plan (PCIP). By 2014 all employees will be able to sign up for individual coverage at the state health insurance exchange regardless of preexisting conditions and many will receive federal subsidies to help play their premiums.
Why an HRA for Small Group Coverage?
An Health Reimbursement Arrangement is simply an arrangement where an employer reimburses employees tax-free for qualified medical expenses, including health insurance premiums. HRAs may be offered in conjunction with other employer-provided health benefits. Employers have complete flexibility to offer various combinations of benefits in designing their plans. You do not have to be covered under any health insurance plan to participate.
On June 26, 2002, the IRS issued Notice 2002-45 and Revenue Ruling 2002-41 that opened the door for employers to legitimately reimburse non-group health insurance premiums to their employees as a tax-free fringe benefit. Since individual health insurance premiums can be up to 50% less than group health insurance premiums, some employers, frustrated by their lack of control over ever-increasing group health premiums, are dropping group health insurance and establishing HRA plans to allow employees to go out and buy their own coverage.
An Example of a Cheap Small Group Benefit Plan
For example, the employer funds $200 per month per employee for reimbursement of qualified medical expenses. Whatever is not spent accumulates for future use.
The employee submits claims to their employer or a Third Party Administrator (TPA).
The employee receives reimbursement for their approved claims, up to the amount of their HRA fund balance.
The Small Business Owner Has Total Control
The employer has a lot of flexibility in setting up the account. You get to decide what you will reimburse. In addition to health insurance premiums, you could offer to cover dental expenses, chiropractic expenses, or any other out-of-pocket medical expenses. You also establish the maximum amount in each category that you will reimburse. So you are always in control of your costs.
Under a health reimbursement account, the employer provides funds, not the employee. When you set up the HRA, you get to decide whether or not to allow funds to roll over at the end of the year. Health reimbursement accounts remain with the employer and do not follow an employee to new employment, but the employee can take their individual health insurance plan with them.
How Does An Small Business HRA Work?
HRA plans are also now extremely easy to set up, and to manage. A number of HRA administrators provide an online HRA enrollment form, where you establish reimbursement limits, and qualification parameters. The administrator provides plan documents for tax purposes. Employees will submit their claims to the administrator. They will then be reimbursed for their qualified expenses.
Benefits of Individual Health Insurance vs Group Health Insurance
The employees are free to choose the type of plan that best meets their needs. They may wish to get a traditional co-pay plan, or a cheap high-deductible plan. Once they are approved they can take their coverage with them, even if they later leave the company.
For the employer, there are no COBRA issues, no need to set up enrollment procedures for a group health plan, and you'll no longer have to shop your health insurance every year.
What Expenses Can a Small Group HRA Reimburse?
The main reason for establishing an HRA is to be able to reimburse your employees for the cost of individual health insurance premiums. But you can also designate the plan to cover other expenses as well, including...
- Dental coverage
- Vision coverage
- Rx benefits
- Medicare and long-term care premiums
- Disability premiums
- Life insurance premiums for up to $50,000
- Preventative care benefits such as annual physicals, preventative screenings, weight loss programs, or smoking cessation programs
- Alternative care such as chiropractors and acupuncture
Can Small Group HRA Participation be Selective
A California employer can exclude employees using the guidelines outlined in IRS Code Section 105 (h). This allows you to get the most out of your investment.Specifically, you may if you exclude:
- Employees who have not completed 3 years of service;
- Employees who have not attained age 25;
- Part-time or season employees working less than 7 months per year or 25 hours a week
Combine a Health Savings Account with Your HRA Plan
An Health Savings Account (HSA) is available to anyone with a qualified high-deductible health plan. An individual with an HSA can fund their account up to $3,050 in 2011, for a family the limit is $6,150 into a tax-deductible account, which can then be used to pay medical expenses. A family can get up to $6,150 full write-off on their federal income taxes. If the money is not used, it is the employee's to keep and just grows tax-deferred like an IRA.
HSA plans have lower premiums. They save money on taxes, and they are the very best tax-advantaged way to save for future medical expenses one may incur during retirement. By combining an HSA with their HRA, your employees will be able to increase their tax benefits even further, and avoid withdrawing money from your HSA. This will enable them to take full advantage of the tax-deferred growth that an HSA offers.
Some advisors say that one cannot have both an HSA and an HRA, this is not the case. An HRA does not disqualify someone from having an HSA, if the expenses reimbursed by the HRA are limited to medical items allowed for first-dollar coverage on an HSA plan. Specifically, the HRA may not cover expenses that are meant to apply directly toward the deductible of their HSA-qualified plan. So it cannot reimburse for doctor visits, prescription drug coverage, or hospital charges prior to meeting their deductible, if combined with an HSA plan. Generally, an HRA would be used to reimburse the employee's health insurance premium as well as expenses not covered by the health insurance, such as dental and vision expenses. Reimbursing these expenses through the HRA again makes them a tax-free fringe benefit, saving your employee Federal income taxes, state income taxes, and FICA.
How Much Paperwork is Involved in a Small Group HRA?
HRAs are very easy to establish and manage. Several low-cost administrators make the process very simple, and ensure that you are in compliance with all federal regulations for less than $500 for the first year. Very small businesses can usually handle the administration duties themselves from that point on.
Basic Documents Required to Establish an HRA for a California Small Group
- Plan Document
- Summary Plan Description which must be furnished to all plan participants
When you apply for an HRA with one of our third-party administrators, the framework, documentation, and administration is provided, making offering the employee benefit plan simple and easy to do. All you have to do is fill out a simple questionnaire which takes about 5 minutes. You will then receive a pdf copy of all documents.
Getting started with a Small Business HRA Benefit Plan
Have your employees apply for an individual health insurance plan at HealthcareShopper.com. Your employees can use their tax-advantaged HRA funds to choose from hundreds of individual plans ranging from comprehensive copay plans to catastrophic high-deductible plans. They can get instant quotes and compare dozens of plans. Remember, until January 2014 individuals can be denied coverage for preexisting medical conditions so it's a good idea to get the health insurance coverage first.
They can choose from carriers such as Aetna, Anthem Blue Cross, Blue Shield of California, CIGNA, Health Net, Kaiser Permanente, PacifiCare, and United Healthcare. They can enroll online or by calling 800-557-5693 to be assisted by our licensed agents.
Get Signed Up for an HRA Small Group Benefit Plan
An HRA plan is ideal for small businesses with employees that are all in good health. They are easy to establish and manage, your employees get permanent health insurance coverage, and your business will save thousands of dollars. If you have any questions or need some assistance, please email us at sales@healthcareshopper.com, or give us a call at 800-557-5693.
