Here’s a common scenario that most small business owners have experienced. Your health insurance renewal arrives in the mail. You set it aside for a week or so, as you really don’t want to open it. One day you muster up the courage to finally review the dreaded news.
You search through all of the legal mumbo jumbo and finally find the new rates. With a little help from your calculator, you realize that the increase is 15%, ouch! But wait, there are a few alternative options listed. And one of them will limit your premium increase to only 5%. This seems like wonderful news, until you realize that the cheaper plan has a much higher deductible than your current policy.
So this brings us to the most common health insurance renewal dilemma. You can either:
- Pay a higher premium but keep your employees’ out of pocket expense the same.
- Pay a lower premium but raise your employees’ out of pocket costs.
It seems like a lose/lose situation. But, a Health Reimbursement Arrangement offers a third option:
- Pay a lower premium and keep your employees’ out of pocket expense the same.
Let me explain how this is possible.
What is a Health Reimbursement Arrangement?
First, let’s define Health Reimbursement Arrangement (HRA). In its simplest form, an HRA is a promise by the employer to reimburse employees for certain out of pocket expenses. How about an example?
Let’s say that your company purchased a $5,000 deductible medical policy to help lower your premiums. But, your old plan had a $3,000 deductible. And some of the employees are nervous about the substantially higher out of pocket costs.
This is a perfect scenario for an HRA. Here’s is how you could set it up:
- The employee pays the first $3,000 of deductible expenses (which matches the old plan’s deductible).
- Through the HRA, the employee is reimbursed for the next $2,000 of deductible expenses.
So you end up paying a lower health insurance premium. While at the same time, limiting your employees’ out of pocket expenses. And if set up correctly, any employee reimbursements made under the HRA should by covered by the savings you realized by moving to the higher deductible plan.
Small businesses typically cannot customize their health insurance plan. Let’s say, you may like the price of an insurer’s $3,000 deductible plan. But perhaps it has a high Emergency Room copay or high doctor copays. So, you have to take the good with the bad.
However HRAs are infinitely flexible. So you can offer the $3,000 policy and then set up your HRA to reimburse all or part of the copayments, for example:
- If the ER copay is $300, the HRA could reimburse the employee $150 for that service.
- If the specialist copay is $70, you may decide to have the HRA reimburse $20 for those instances.
Set up and Administration
Compared to other medical expense reimbursement funds, like an HSA or an FSA, Health Reimbursement Arrangements are incredibly easy to set up and are a snap to administer. Here are some highlights:
- No need to create or maintain a separate bank account.
- The reimbursement amounts do not need to be pre-funded (you can pay claims as they’re filed).
- A simple legal document must be created and distributed to the employees.
- Employers can typically deduct reimbursements on their taxes.
Many health insurance companies even offer to administer the HRA on behalf of the employer, sometimes there is a small fee for this service. And some health insurance brokers, like us, can help you create the HRA set-up documents for no charge.
Big businesses often self insure their health insurance programs. And by that I mean that they pay all of their own medical claims in order to cut out the insurance company and save premium. And while this sounds great on paper, it would be very difficult for most small employers to take on such a huge risk. But through an HRA, small business owners can achieve similar goals.
By purchasing a higher out of pocket cost plan, you can effectively lower your premiums. And then use those savings to reimburse your employees when they incur costs above whatever threshold you set. And instead of the insurer keeping the unused funds as their profit, the money stays with your company.
If you are interested in reviewing HRA options for your company, please contact us. We will be glad to show you illustrations and customized reports that will help you decide if an HRA is right for you.