Health insurance costs for small businesses keep increasing. This happens year after year and I know I’m not alone! I’m not talking about little increases; for us it’s always well into the double digits. Switching providers proves to be a huge pain and still involves an increase. Typical solutions include passing on more of the expense to employees and reducing the amount of benefits they receive. I was sick and tired of passing this burden on, so I got creative this year. We’re trying out a Health Reimbursement Arrangement (HRA), a creative and flexible way to offer great benefits and save money.
With an HRA, you switch to a significantly less expensive health insurance plan, one with a deductible, higher co-pays and larger prescription costs, for example. The savings earned with this cheaper plan can then be used to reimburse employees for health-related costs. The HRA is a federally-approved account, contributed to by the employer. The employee never actually owns the money but gets reimbursed for out-of-pocket expenses. Employers can detail which expenses are covered and set maximum payments, thereby controlling total costs. Thus, insurance is used for significant, unforeseen loss and not routine expenses, its intended purpose. This is a fundamental change in how most of us use insurance, and it's a rising trend for the reasons outlined below:
Great for employees. I see this as being a win-win for employers and employees. You do need to invest in explaining this to employees (your broker can help) but its an easy concept to understand and appreciate. Employees have an easy one page enrollment form and then get a credit card in their name ready to use for authorized purchases. HRA funds are tax free.
Our company’s old insurance plan had $25 office visit co-pays and with our new plan it increased to $75. However, with our HRA arrangement employees can use their card for all co-pays and don’t even have the $25 expense anymore. Unless you set a maximum that the employees hit, it’s certainly a more desirable arrangement.
Ultimately, employees have more choices and more coverage. For me personally, when our old plan charged $50 for a specialist, I didn’t want to go to physical therapy for my knee regularly. Now that this doesn’t come out of pocket, I’m much more likely to go, getting proper health coverage options is better for everyone.
Great for employers. You can use the same insurance company; you simply switch plans without worrying your employees' doctors won’t be in the new networks. You will need a third party HRA provider (we use, and like, http://www.choice-strategies.com); this removes legal risk and makes set-up and administration easy.
Money put towards the HRA is tax-deductible but not pre-funded; the money is used as needed. It’s only a promise to pay so you don’t need to dump loads of cash in advance. Importantly, most likely all the funds allocated for reimbursing employees won’t be claimed, which offers you savings. You can set maximums on reimbursements to fully limit your overall liability, but you still might see considerable savings. According to Alan Nadolna of The Associates Group, employees generally use only 30% to 40% of the funds earmarked for the HRA.
Imagine being able to provide better health insurance for your employees but only paying for it if your employees use it. Take control of your health care expenses and build a strategy around it. Provide stronger benefits to your employers. It’s no wonder health reimbursement arrangements are on the rise.