First of all, searching for HRAs for dummies does not, in fact, make you a dummy. HRAs are complex and there's a lot to know! We've put together this post to explain the high-level basics of what HRAs are, how they work, and who they might benefit.
HRAs for Dummies
HRA stands for health reimbursement arrangement. It represents a new model of benefits that allows for tax-free reimbursement of premiums and medical expenses. Let’s see how HRAs stack up as an alternative to group benefits.
Historically, the main advantage of traditional, employer-sponsored group plans was that they were deductible expenses for employers and were taken out of employee paychecks on a pre-tax basis. These days, group plans are unaffordable and cumbersome, and they force employees to choose the same type of plan, despite their unique needs and preferences.
Businesses like yours face two main hurdles when it comes to group plans: participation rates and cost.
Participation rates: Small businesses are required to maintain a minimum threshold of participation to keep their group plans. While the percentage varies, you can expect at least a 70% participation rate requirement. That means if just a few employees decide not to participate, you cannot offer a group plan.
Cost: According to the most recent data from The Kaiser Family Foundation, group health insurance costs averaged around $650 (for singles). This means that if you, the employer, contribute 83% of costs to match industry standards, you’ll likely be paying more than $500/mo per employee. Another challenge is annual premium increases which are unpredictable and expensive—two things small business owners don’t want to deal with.
Enter the HRA. This modern, optimized method of offering health insurance is changing the way we talk about benefits.
→ For decision making support, check out our post on what the best insurance is for your business.
Let's walk through the basics.
What are HRAs?
Health Reimbursement Arrangements (also known as HRAs) are based on reimbursing your employees for health insurance rather than buying it for them. Unlike a health insurance stipend or basic reimbursements (both are taxed as income), reimbursing with an HRA allows you to reimburse for premiums and medical expenses tax-free.
→ Wondering if an HRA is health insurance?
→ Learn more about HRA health care options.
How do HRAs work?
Health insurance HRAs allow employers to set a monthly reimbursement budget that works for them. Then, employees purchase an individual health insurance plan that works for them. After that, employees get reimbursed on their paycheck.
Reimbursing for health insurance brings budget control and flexibility for business owners and more choice for employees.
What are the different types of HRAs?
QSEHRA: the qualified small employer HRA is designed for small businesses with 1-50 employees, who do not offer group coverage. This HRA includes a contribution limit on reimbursements ($5300 for individuals and $10,700 for families).
ICHRA: the individual coverage HRA is basically a “super-charged” version of the QSEHRA. It works for businesses of any size and does not include contribution limits.
How do HRAs compare to group plans?
Here are a few things that HRAs can offer that group plans simply cannot.
Flexibility: Employees will enjoy the flexibility HRAs offer. They can shop the plan on the individual market that best meets their needs. If one employee prefers their Aetna plan, no problem. If another would like a BlueCross plan because the network includes his preferred doctors, that’s great too!
Portability: Job changes aren’t uncommon in today’s market. But your health insurance shouldn’t have to change just because you change jobs. If you are offered an HRA at a company and then end up leaving—say, to go out on your own, your health plan will stay with you. No need to stress over pricey COBRA plans or switching plans that might not have your doctor in network; your individual plan will stay with you.
Cost: According to our clients, the #1 benefit that convinced them to sign up for an HRA was cost control. With health reimbursement arrangements, employers can define their benefits budget and stick with it. Simply set the allowable reimbursement rates and employer costs will never be greater than that. And if employees don’t buy insurance or don’t use all of their allowance? The employer keeps the money. No more surprise group increases year after year, no more pricey group plans, and no minimum participation requirements to worry about.
Take Command, your HRA experts
We'll share more about the benefits you (and your employees) will enjoy from an HRA but click the button if you'd like to schedule a call with one of our HRA Design Consultants.
→ Read more about Employer HRA Contributions.
→ More information on how HRAs work for expenses for spouse, family or dependents
In the meantime, our comprehensive guides should answer most of your questions about the ICHRA and the QSEHRA. Check out a side-by-side comparison of group plans and the specific HRAs mentioned above. The QSEHRA is here. The ICHRA is here.
