Friday, October 26, 2012

As employers review their renewal options for employee benefits for 2013 it may be the time to consider a health reimbursement arrangement to complement your employee group health coverage.

H.R.A.'s are not new but are one of the options employers can use to reduce the cost of coverage for both the company and the employee. Here are the basics:

1. HRA's are funded completely by the employer;

2. Funds in an HRA can rollover from year to year if the employer chooses;

3. HRA funds remain the property of the employer;

4. The employer can define the items covered under a HRA plan;

5. The HRA can be used with a High Deductible Health Plan and Health Care Savings Account.

The best way to view an HRA is a promise to reimburse a covered employee for qualified medical expenses. The amounts and covered expenses can be determined by the employer. Plans can be simple or complex depending on the employers needs and plan design.

Here is an example of a simple plan. The employer raises the health care plan deductible from $1,000 to $2,000 to reduce the premiums for both the company and the employees. To assist the employees with this increased potential liability the employer forms an HRA that will reimburse an employee $500 if they reach the $2,000 deductible, essentially only increasing the employee's financial exposure $500. In this scenario the employer would not have to pre-fund the HRA only provide the monies when an employee reached the threshold for reimbursement.

In more complex models the employer reimburses the employee for a host of qualified costs that can include co-pays, deductibles and ancillary health care costs. The IRS dictates that for the reimbursements to be excluded from taxable income for the employee they must be "qualified medical expenses".  In these more complex models the employer actually funds accounts for the employees and many times will provide debit cards for the employee to use to access the funds in real time. There are many qualified third party administrators available to assist in managing these type plans, for a cost of course.

The reason companies will adopt a HRA plan is that by raising deductibles and co-payments premiums will be reduced. If employees do not incur significant health care cost the HRA funds will not be distributed resulting in a win-win for the employer and employees.

HRA's are not fool proof.  If the company experiences a year with high medical costs it is possible the pay out of HRA funds could surpass the premium savings.

To evaluate if your company could benefit from implementing an HRA do the math. You will need to know

1. What the total medical claims cost for the company was last year?

2. How many of the enrollees meet the deductible?

3. What savings can be realized by raising the deductibles and copays?

This information can be obtained from your current carrier with violating HIPPA because it does not contain any individual information just gross claim dollar amounts.

Health Reimbursement Arrangements are an underutilized tool to allow a company to lower the cost of employee benefits and share the increased liability that may result from higher deductibles and co-payments.

If you have questions regarding implementing a Health Reimbursement Arrangement or employee benefit plans contact gary@illuminaregroupinc.com.

Gary O. Garner, EA