Employers and the self-employed are using two main strategies to keep the
cost of health insurance low and to reduce their taxes. Known as an HSA,
a Health Savings Account can make most health care expenses tax
deductible, and provide tax-deferred earnings. Individuals and business
owners can start an HSA once they purchase a health plan that's certified
to be HSA compatible. These plans are available in the individual market
for much lower premiums than plans in the group coverage market.
Can Health Savings Accounts Be Combined With A HRA?
Employers and people who are self-employed if the spouse works in the
business may add a Health Reimbursement Arrangement to substantially
increase the tax savings available with an HSA alone.
To put it simply, a Health Reimbursement Arrangement (HRA) is an
employer-funded medical reimbursement plan for employees. Someone who is
self-employed cannot have an HRA in his or her name, but can reimburse
the spouse, who works in the business as a W-2 employee, through an HRA.
All of the family's qualified health care and insurance expenses can be
reimbursed, and that includes the expenses of the self-employed business
owner by virtue of being a member of the HRA-covered family.
The big rush to get HRAs in place by Dec. 31 resulted because the cost of
health insurance premiums could then be reimbursed for the whole year
back to January 2011. Reimbursement for other kinds of health care is not
retroactive, though. Those who start a HRA in January 2012 can reimburse
their employees for health care, including premiums.
Since group coverage has become an expensive option for both employers
and employees, HRAs present a less expensive choice that can help both
parties save on health care costs. Compared to group plan rates, policies
in the individual market can save employers up to 50 percent. Certain of
these plans, known as Health Savings Accounts, This makes if feasible for
more employers to provide health care coverage to more employees. By
setting up a HRA, employers can legitimately reimburse their employees
for individual health insurance premiums and other health care costs.
How Do Health Reimbursement Arrangements Work?
On a regular basis, an employer contributes a pre-determined amount to an
account on an employee's behalf. The employee can submit a reimbursement
request for qualified medical expenses, and such reimbursements are not
What's Required To Start A HRA?
The primary requirement is that the plan must be funded solely by the
employer. It cannot be funded by salary reduction. In addition, the plan
may only provide benefits for substantiated medical expenses.
HRAs may be designed in many fashions to suit the specific needs of
employer and employees alike. It is one of the most flexible types of
employee benefits plans, making it very attractive to most employers.
How Do Employers Benefit From A HRA?
HRAs are most commonly offered in conjunction with a high-deductible
health plan. As a rule, these plans keep premium costs low, so employers
can use the savings to fund the HRA. All employer HRA contributions are
tax deductible for the employer, and tax-free for the employee.
Employers may establish when HRA funds may be used. This can range from
comprehensively covering all health care to a limited plan for emergency
room expenses only. Because they are so flexible, HRA plans enable
employers to control costs of providing healthcare benefits while
providing a valuable employee benefit.
With an HRA, employee healthcare expenditures are visible and clear to
employer and employee alike, thereby fostering a greater understanding of
the costs of health care. In addition, employees who can monitor and
control their health care costs become smarter health care consumers.
Studies show that only 20 to 50 percent of employees actually use their
health care coverage, meaning employers often pay health insurance
premiums for employees who are not utilizing the coverage. A HRA allows
employers to determine the best type of coverage for their employees
based on the demographics of their employee group.
HRA plans may also cover retired employees (and their spouses and tax
dependents). Employers may wish to consider a HRA as an alternative to
more expensive traditional retiree health care options.
Employee benefits, like a HRA, enable employers to recruit and retain
quality employees. With a HRA in place, the employer is perceived in a
positive light by current and prospective employees because a benefits
package is being provided with their interest in mind.