It’s hard to believe, but the end of 2015 is just a short time away. And for most companies, next year’s health insurance quotes echo those of the last few: Rising costs, with seemingly no end in sight.
But the tools of the benefits trade are catching up with the pains felt by employers. Among many solutions growing in popularity are Health Reimbursement Arrangements (HRAs), which can help take the sting out of higher premiums or having to offer higher deductible plans to employees. So how do they work, and what kinds of companies do they work best for?
First, it’s important to define the tool. A Health Reimbursement Arrangement is an employer-funded account, which allows the employer to fund a portion of the plan deductible. Approved by the IRS, employer contributions into an HRA are also exempt from FICA taxes.
An HRA allows a company to lower its premium costs by going to a higher deductible. But the employer also essentially shares that higher deductible with their employees. For example, if a plan currently has a $500 deductible, the employer could save money by moving to a plan with a $1,500 deductible and funding an HRA to cover the difference.
The employee is still responsible for their $500 of the deductible, and the employer then pays the remaining $1,000. The savings in premium costs often result in significant overall savings, even with the added HRA expense. This essentially allows the employer to self-insure a portion of the deductible, paying for it only if and when an employee actually uses it.
With an HRA, an employer can also decide which medical procedures are qualified expenses. And unlike with other tools such as a Health Savings Account (HSA), the employer keeps every penny invested into an HRA that is not used, regardless of employee turnover or year-to-year utilization.
Which companies should consider an HRA?
HRAs are widely beneficial to companies of all sizes, as they lower employer and employee costs for both small and large companies. However, risk does play a factor. Companies should always assess the size and health of their workforce to determine the level of exposure they are comfortable with. It’s important to calculate that more often than not, employees will not utilize all available funds, leaving the potential for contributions to be rolled over and used to protect against future risk.
It’s also important to realize the “hidden” benefit of how an HRA affects employee behavior. Essentially, HRAs force employees to have a bit of skin in the game, and to carefully consider how they’re taking care of themselves and what medical treatments will truly prove valuable. But at the end of the day, HRAs still allow an employer to have the back of its workers in a time when it’s becoming prohibitively expensive to do so.
About the author: Robert Ritinski is a Benfits Consultant with Creative Benefits, Inc. He specializes in working with clients to design, implement, and service benefits programs that are tailored to meet their specific needs, while reflecting the unique culture of their organization.