The primary employee benefit has traditionally been employer-sponsored health insurance, with the employer often paying the entire premium cost – but not anymore.
The unrelenting rise in the cost of group health insurance has forced many small business owners to accept the fact they can no longer afford to provide conventional group employee health insurance. A solution to this problem could be a health reimbursement arrangement (“HRA”), which can be a mutually satisfying alternative to traditional major medical health insurance for both the employer and employee.
The HRA is a qualified benefit plan in which the employer agrees to reimburse the employee for out-of-pocket medical expenses. There is no pre-funding by the employer and the employee cannot contribute to the plan. The employer’s reimbursement is not considered taxable income to the employee. At the beginning of the plan year, the employer will stipulate how much money will be reimbursed to the employee during the plan year. An employee has no right to cash-out the reimbursement amount nor is it portable, which is a major advantage of the HRA over a group Health Savings Account plan.
The HRA encourages employees to be more cost-conscious when spending their healthcare dollars. An HRA is usually paired with high deductible group health insurance. The HDHP plan lowers the employer’s group premium and annual out-of-pocket medical expenses over the plan reimbursement amount are borne by the employee.
The HRA requires a third-party administrator and the plan cannot discriminate in favor of the owner. In fact, S corporation and self-employed owners and their families cannot participate in a HRA – only common law employees can.
We routinely advise our small business clients to employ a HRA to help remedy their employee health insurance cost problem and we stand ready to help your business do the same.
