Business owners would be wise to evaluate all available options when it comes to pricey health benefits and employee coverage. Traditional methods of offering health benefits like group plans or pay increases fall short in many ways. HRAs, on the other hand, solve many of those common pain points. But just how do they do that? The key difference rests in the tax savings that accompany an HRA. Let’s take a look.
First, some history:
In the past, a big advantage of group plans was that they were deductible expenses for employers and were taken out of employee paychecks on a pre-tax basis. More and more, these big group plans are simply unaffordable and cumbersome for small business owners to offer. Another disadvantage of group plans is forcing everyone to choose the same type of plan, when people by nature have different needs and preferences.
Fast forward to the implementation of the 21st Century Cures Act, a new tool allows small businesses to enjoy the same tax benefits as big corporations, with more customizable and flexible options for employees to choose what's best for them.
HRAs vs. medical stipends
Some employers offer a regular, fixed amount of money, or stipend, to their employees to help cover the cost of health insurance. While this option is easy from a time and administration perspective, the value of these dollars will be greatly diminished because they are considered taxable income. Furthermore, simply writing off the stipend as a business expense will have payroll as well as income tax implications.
Health stipends aren’t subject to compliance issues that group plans have, and they can be really easy to administer through payroll. But they aren’t tax advantaged like an HRA. Not only are small businesses required to pay payroll tax on the reimbursements, employees must claim the stipend as income and there isn’t exactly any accountability for whether or not the money is even used for health insurance.
With an HRA, employers can make reimbursements without having to pay payroll taxes and employees don’t have to recognize income tax. In addition, reimbursements made by the company count as a tax deduction. Pretty awesome, right?
Benefits of HRAs
- Transfers employer responsibility for health risks.
- Transfers health decision making from employer to employee.
- More personalized plan choices for employees. No employee is locked into a plan that might not be a good fit for them. They can also take their plan with them if they leave.
- Simpler and more flexible plan design options.
- Greater budget control.
- No participation concerns.
So how do HRAs work?
The employer chooses an HRA for her company, sets a budget that works for them, and then lets the employers know they can use it. From there, once an employee pays for a medical expense or premium, they just turn in the receipt and submit for reimbursement.
For companies that help employees with health insurance by offering a health stipend or by adding to employee salaries, tax-free reimbursement will typically have a huge tax advantage for both employer and employee. For example, if a 10-person company offers employees $300/mo ($3,000/mo in total reimbursement) by increasing salaries versus tax-free through an HRA, $1,200 a month ends up going to taxes each month.
For companies that help employees with health insurance by offering a “health stipend” or by “adding to employee salaries”, HRAs win over medical stipends because of their huge tax advantage.
Sometimes referred to as “401(K)-style” insurance, two recently created HRAs allow an employer to reimburse for medical expenses and/or insurance premiums on a tax-free basis.
Under this arrangement, employees purchase their own health insurance on the open market and then submit claims to their employer to get reimbursed for the cost of their premium and if allowed, all qualified medical expenses.
- The qualified small employer HRA (QSEHRA) requires your business to be small, with less than 50 Full Time Equivalent employees, and you can't offer a group plan at the same time. If you meet those qualifications, you can use an HRA administration tool (like ours!) to create your QSEHRA, decide how much you’ll reimburse each month (up to the contribution limits), let your employees choose the plan that works best for them, and reimburse them when they submit receipts!
- The individual coverage HRA (ICHRA) is almost like a “super-charged” version of the QSEHRA. Instead of being capped at 50 employees, employers of any size can set up an ICHRA for their teams. There are also no contribution limits with this HRA. Another key differentiator from HRAs in the past? ICHRA allows business owners to customize their reimbursements across different classes of employees. While everyone must be treated fairly within a certain class, reimbursement rates can vary between full time, part time, seasonal, remote, etc.
Take Command is here to help
Take Command makes setting up a small business HRA for your business easy. Our team will help you set your budget, take care of the admin paperwork, and help your employees pick a plan that suits their needs. No need to worry about finding the perfect plan that has the right doctor network or prescription coverage, ultimately leaving someone left out and disgruntled. With the HRA, each employee picks the perfect plan for them that fits within your budget. Sounds like a win-win to us!
A wife to one and mother to four, Keely does all of the things. She’s also dabbled in personal finance blogging and social media management, contributed to MetroFamily magazine, and is passionate about good food, treasure hunting and upcycling. With a B.S. in Psychology from the University of Oklahoma and a knack for a witty punchline, it’s no surprise that Keely’s social posts are as clever as they get. In her (very little) free time, you’ll find Keely with her nose in a book or trying out a local restaurant with her family.