If you are not currently offering employee health benefits, either due to the costs involved or the inability to meet the required contribution or participation requirements of a group health insurance plan, then an HRA may also be the cost-effective solution that you are looking for.

Although there are several types of HRA’s available, this article will focus solely on the Stand-Alone HRA.

What is a Health Reimbursement Arrangement?

    An HRA is a Defined Contribution Plan. Group health insurance is a Defined Benefit Plan.  An HRA is simply an arrangement for tax-free medical expense reimbursement between an employer and employee.  It’s an employer-funded plan that may be used to reimburse employees for eligible medical expenses, including but not limited to, health insurance premiums.

Advantages of an HRA to the Employer:

•     Cost Savings:   HRA’s are an attractive alternative for employers who want to provide some type of employee health benefit, but have been priced out of a traditional group health insurance plan. With an HRA, the employer defines the maximum budget for employee healthcare expenses, and thus creates a fixed-cost expense.  Reimbursements made to employees are tax deductible to the employer (consult with your Tax Advisor.)
• Unlike a Health Savings Account or Flexible Savings Account, the money that is made available through an HRA is owned by the employer until reimbursement is made.  The money does not need to be pre-funded into another bank account.  This gives the employer access to the earmarked money until a request for reimbursement is made and approved.
•     Ease of Implementation:  There is no minimum contribution or minimum participation requirement necessary to create an HRA.
•     Flexibility:  Employers can customize all components of their HRA plan. They can set up different benefits for different employee classes.  For example, an Office Manager may receive $300.00 in monthly benefits and a Dental Hygienist may be eligible for $200.00 per month.  The employer also determines what criteria is necessary to become eligible for benefits, what types of expenses will be reimbursed and what happens to unused funds at the end of the plan year.
•     Compliance:  When properly designed and administered, a Health Reimbursement Arrangement is compliant with all requirements of ERISA, HIPAA, the IRS and the ACA-Affordable Care Act.
•     Healthcare Reform Compatibility:  The Affordable Care Act will not require small businesses with less than 50 full-time equivalent employees to provide group health insurance benefits. Employers will not incur a tax penalty, so an HRA makes financial sense.
•     Reduced Administration and Ease of Use:  An HRA is administered by a third party and is usually completely paperless.  Employers can finally get out of the health insurance business (enrollments, terminations, premium increases, renewals, etc.) so that they can focus more on their core business.  The HRA becomes a function of payroll and takes only minutes each month to administer.

Advantages of an HRA to the Employee:

•     Cost Savings:  Employees can save an average of 20% to 40% on medical expenses by using “pre-tax” dollars rather than “after tax” dollars.  Since employees pay up front for their medical expenses, an HRA will allow them to see where they are spending their health and wellness dollars so that they can make better informed healthcare decisions.  This may result in reduced costs to both the employee and the employer.
•     Flexibility:  Employees will have the freedom of choice to purchase a private health insurance plan that best fits their needs and the needs of their family, including choices between multiple health insurance carriers and individual plan designs.  All health insurance plans will become Guarantee Issue beginning in January 2014 so there will be no risk of being denied coverage.   Many employees will become eligible for tax credits that will be available through the Health Insurance Marketplaces, and this may allow them to purchase more coverage for less money.
•     Portability:  An individual health insurance plan is not tied to employment.  Employees will be able to retain their health insurance plan if they switch jobs, as long as they continue to make the monthly premium payments.

Process Flow for Employers Interested in Establishing a Stand-Alone HRA:

1.     Employer determines annual HRA budget for company and then each eligible employee.
2.     Employer designs the HRA.  When will the plan start?  What are the different employee classes?  What HRA allowances will you provide and at what frequency?  What criteria make your employees eligible?  What types of medical expenses will the HRA reimburse?  What rollover options will be allowed, if any?
3.     Employer chooses an HRA Administration Software company to help create and implement the HRA.   HRA Software should be used to ensure federal compliance and ease of administration.  HRA Software will create the necessary legal plan documents and process all reimbursement requests.
4.     Employees are enrolled.

How Does a Stand-Alone HRA Work Once it is Implemented?

•     Employees purchase an individual health insurance policy. (Not required.)
•     Employees submit eligible expenses to the HRA administrator via the software system.
•     HRA Claims Processor approves expenses and notifies employer of amount due.
•     Employer reimburses employee tax-free via payroll.

Whether you are the owner of an established dental practice that already has a group health insurance plan in place and are finding that increasing premiums are no longer sustainable, or if you are the owner of a brand new practice and are not yet in a financial position to offer group health insurance or do not meet the participation or contribution requirements necessary to offer group health insurance, an HRA may be a viable option for you to consider.  Your CPA should be able to help you better determine if an HRA is in your best interest.

A Health Reimbursement Arrangement will provide you with the ability to offer employee health benefits while controlling your health plan costs.  The flexibility, control, and ease of administration make an HRA an attractive alternative to a traditional group health insurance plan.

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