With the cost of health care continuing to rise and the COVID-19 situation still in the forefront, the need to find creative methods to pay for medical expenses has never been more relevant. According to the 2021 Large Employers’ Health Care Strategy and Plan Design Survey, conducted by Business Group on Health, employers project the cost of health benefits will increase by 5.3% in 2021, although the impact of COVID-19 is causing uncertainty about overall costs. Nevertheless, the total cost of health care, including premiums and out-of-pocket costs for employees and dependents, is projected to be $15,500 per employee in 2021. In keeping with trends from recent years, employers generally will cover 70% of the cost while employees will cover the remaining 30%. These figures suggest that employers will be looking for innovative ways to control the cost of their employee benefit programs, while employees will need help coping with their out-of-pocket expenses.
A relatively easy-to-administer yet cost-effective solution is the Health Reimbursement Arrangement (HRA). One of the benefit’s more unique qualities is its ability to mitigate the ever-increasing problem of managing health care dollars. And better yet, the flexibility of the HRA lends itself to a variety of applications—essentially making it a viable solution no matter the employer’s unique situation.
What is an HRA?
A Health Reimbursement Arrangement is an employer-funded health benefit plan which establishes an account in the participant’s name. Contributions are made completely tax-free*, meaning the employer saves up to 7.65% in FICA taxes and the participant receives 100% of the value of each benefit dollar.
Designed to reimburse participants on a tax-free basis for their eligible medical expenses and/or health insurance premiums, the HRA offsets their out-of-pocket health care costs. Additionally, HRA funds are invested in a fixed or variable account to potentially grow over time and any earnings realized are tax-free! Regardless of how the HRA is used, there are some additional benefits that come with offering this plan:
- Qualified medical expenses can be determined by the employer. While the global list of eligible HRA expenses is provided under Section 213(d) of the Internal Revenue Code, the employer can choose to limit the plan to certain expenses within that list, such as a premium only HRA.
- 100% of account balances can roll over year to year or the employer can designate a rollover amount. Any of the unused funds can be forfeited to the plan to fund future HRAs!
- Funds can be used to reimburse eligible medical expenses incurred by the participant, their spouse, and any qualifying dependents. If the participant should pass away, the surviving spouse and eligible dependents are able to use the remaining funds.
What are the HRA Options?
MidAmerica has designed three unique HRA applications to ensure the benefit offered meets the needs and goals of both the employer and the employee. Flexibility is a key component of the HRA, as plan design will take into consideration factors such as contribution amounts, vesting schedules, deposit frequencies, and definitions of which medical expenses are eligible for reimbursement.
Defined Contribution HRA: Attract and Retain Talent While Reducing OPEB Liability
A defined contribution HRA (dcHRA) allows employers to deposit a fixed dollar amount into the HRA while the employee is actively working. These funds can be accessed upon the employee’s retirement or separation of service. The dcHRA is a quantifiable retirement benefit that can reduce the employer’s OPEB (Other Post-Employment Benefit) liability while attracting and retaining top talent. The dcHRA can use unique sources of funding such as unused sick leave and unused vacation pay, or other forms of incentive compensation that are typically already earmarked for payout. Because the account is funded during employment, the employer is better equipped to manage cash flow and participants become 100% vested immediately, meaning they own the account balance as soon as the account is established. What’s more, the dcHRA enables employers to restructure costly “promise to pay” retirement health care plans while still affording a valuable, portable health care benefit for their employees.
Retiree HRA: Offset the Cost of Rising Retiree Health Care Using Earmarked Funds
With a retiree HRA (rHRA), funds are deposited in a lump sum upon retirement or separation of service. Like the dcHRA, the rHRA can also use unique sources of funding such as unused sick leave and unused vacation pay. The funds are invested once deposited and are available for immediate use by the retiree.
Both the dcHRA and the rHRA provide an opportunity to bridge the gap between retirement and Medicare eligibility for the participant. Given this financial incentive from the employer, a worker may consider retiring earlier than originally planned, and may even use the HRA funds to select an alternative health care option rather than remaining on the employer’s plan, thereby reducing some of the administrative burden for the employer.
Integrated HRA: Offset High Deductible Health Plans or Offer in Lieu of Health Benefits
The integrated HRA (iHRA) is designed for active employees enrolled in group medical coverage. The employer deposits a fixed amount into the participant’s HRA to fund the reimbursement of eligible medical expenses, such as deductibles, and the funds are available immediately upon contribution. Much like a Health Savings Account (HSA), this type of HRA enables the employer to offer lower premium plans with higher deductibles without increasing the cost to the participant. Unlike the HSA, however, the iHRA treats health insurance premiums as qualified medical expenses**, supporting the argument that the iHRA is an ideal solution for making health care plans more affordable for both the employer and the employee.
The iHRA also serves another meaningful purpose in that it can be used to assist employees who have selected group health coverage under another employer, such as their spouse’s. An employer might be inclined to offer cash in lieu of health benefits for these individuals, in turn reducing the cost of their group health plans. However, this avenue can expose an employer to regulatory and legal complications that can jeopardize their plan’s compliance if not administered properly. Instead of making monthly cash payments directly to employees in lieu of benefits, there is a safer and more cost-effective solution—the money can be deposited into an iHRA.
Regardless of the plan design, the HRA participant will always receive the benefit of tax-free deposits into their account, tax-free reimbursements for qualified medical expenses, funds that carry over year to year, and the convenience of claims submission via online platform, mobile app, and a debit card.
HRAs provide versatility that can satisfy a wide range of health care benefit goals. The flexibility of HRA applications provides both employers and their employees with a winning benefits solution that drives substantial savings for all concerned. If you’d like to learn more about HRAs, simply email us at [email protected].
*Not subject to FICA taxes of 7.65%, or Federal or State income taxes
**HSA funds cannot be used for health insurance premiums unless the participant has reached the age of 65.