Product Highlights

Health Reimbursement Arrangements (HRAs)

If you have not investigated how establishing an HRA may reduce your company’s health insurance expense, you may be missing the boat.

Health Reimbursement Arrangements are a cost effective tool that can substantially impact your health insurance premiums.  As many of you know, reducing health insurance premiums is easy.  Just take away benefits.  The problem is that many employers are concerned about the potential backlash from employees.  We live in a competitive business world and we all know that hiring a new employee is far more expensive than retaining a seasoned employee.  That is where an HRA can help.

An HRA is a formal plan that allows an employer to reimburse employees for certain out-of-pocket medical expenses.  Lets assume that an employer with 20 employees is considering changing from a $500 deductible health plan to a $1,000 deductible health plan.  Let’s also assume that the employer will save $12,000 annually on insurance premiums.  Now lets assume that the employer will establish n HRA at an annual cost of $1,500 and “promise to pay” the second $500 dollars of deductible for each employee.  The employees are happy because their benefit levels did not change.  By establishing a formal HRA, the employer can deduct the deductible reimbursements it makes on behalf of the employees, and the employees receive that reimbursement tax-free.

That leads us to the next question.  Where is the savings?  The answer comes from the fact that an HRA is a “promise to pay”.  The fact is that not everyone generates medical expenses.  In fact, less than 20% of the population generates more than 80% of health care expenses.  In the example above, if every employee met their deductible and the employer reimbursed every employee $500, they would have a net savings of just $500.  In reality, most of the employees would not have met their deductible and would not require a reimbursement.  On average, we would expect 4 of the 20 employees to meet their deductible.  In that case, the employer has now saved $8,500.

If you are not considering the impact of an HRA when making health insurance decisions each year, you could be letting savings pass you by.