Health Reimbursement Accounts for Employees
Health Reimbursement Accounts for employees is a strategy that employers can use to reduce group health insurance premiums. A Health Reimbursement Account (HRA), or also known as a Health Reimbursement Arrangement, is an employer-funded, tax-advantaged program that reimburses employees for out-of-pocket medical expenses. It is IRS approved under Section 105 of the IRS code.
Used in tandem with a high deductible health plan (HDHP), an HRA is an account that can be used to pay for an employee’s medical expenses such as; deductibles, co-pays, coinsurance and medical care. An HRA allows the employer to make contributions to an employee’s account and provide reimbursement for eligible expenses.
Business owners are exploring new ways to offer health insurance plans to employees and one way this can be done is by offering a Personal Health Insurance Reimbursement Account. The employer benefits from this type of program because he or she is still offering a company health benefits program but not in the traditional sense of a company sponsored group health insurance program.
There are two ways an employer can utilize this concept:
1. Give Employees a Taxable Health Care Allowance – With this method, the small business owner reimburses his or her employees for their personal health insurance costs on an after tax basis and offers a health care allowance (reimbursement) stipulated by the employer.
2. Health Reimbursement Arrangement – Section 105 IRS Code: Very similar to the above concept but this allows employers to make pre-tax contributions to an employee’s health insurance account to pay for qualified medical expenses. The amount of reimbursement is also established by the employer but is formalized under IRS Code 105 for HRA’s. This plan must be designed to comply with the Affordable Care Act’s Market Reform.
The benefits to the employee for this type of arrangement are:
Flexibility: Allowing your employees to purchase their own health insurance gives employees flexibility in choosing a plan that meets their needs. Many group health insurance plans today are one size fits all and it is very challenging for employers to choose a health plan that satisfies every employee.
Portability: Employees that purchase their own health plan own their insurance and as long as they pay the premiums, the insurance plan stays with them. Traditional group health plans are rarely portable and when an employee leaves the employer, the health plan stays behind.
Guaranteed Issue: One of the major benefits of Health Care Reform was not allowing insurance companies to discriminate against people with previous health problems. Personal health insurance plans are now guaranteed to be issued no matter what health problems exist.
Most small business owners want to offer health insurance to their employees. It provides the opportunity to retain and attract quality employees but traditional group health plans are becoming too expensive. A Personal Health Insurance Reimbursement Account is another way for an employer to share in the cost of a health insurance program with their employees with less responsibility and less cost.