How Small Businesses Can Cut Their Health Insurance
Costs In Half
March 28, 2008
Vol. 4, Issue 3
Small business owners can now take advantage of Health Reimbursement Arrangements, or HRAs, as a way to cut their health insurance expenses in half. As health insurance premiums continue to grow, fewer small businesses are offering group coverage to their employees. For small businesses with healthy employees, establishing HRAs can be a great way to help their employees obtain permanent, portable individual health insurance at a much lower cost than conventional group coverage.
What is a Health Reimbursement Arrangement?
A Health Reimbursement Arrangement, or HRA, is simply an agreement by an employer to reimburse the employee for their health insurance premiums and other specified medical expenses. This is considered to be a tax-free fringe benefit for the employee.
Because family and individual health insurance plans are underwritten (meaning that the insurance company has the option of excluding a condition or declining an application all together), they are much less expensive than are group plans. In fact, they typically cost less than half as much.
Health Reimbursement Arrangements are also known as Section 105 plans, named after the section in the U.S. Tax Code that governs them.
How HRAs Work
I actually wrote about Health Reimbursement Arrangements in the March 2007 Maximize Your HSA, but my focus there was on self-employed people who only insure themselves or their family. This time I want to talk about how important this tool can be for small business owners with employees.
In today's business climate employees are quick to go elsewhere if they see a better opportunity. Providing good benefits is essential to retaining the best employees, but group health insurance can be too expensive for some small business owners.
An HRA allows you to reimburse your employees for their individual health insurance expenses, taking you out of the middle. Employees carry their own private coverage which is totally portable and not tied down to their employment.
You no longer have to administer the plan, and you no longer have to shop it every year. When employees carry their own private coverage, there are also no COBRA issues to deal with when employment terminates.
When you establish an HRA for your employees, you define what expenses that you will be reimbursing, and how much you will reimburse. For example, you may say that you will reimburse up to $300/month for covered health insurance and medical expenses. If the employee uses less than that, any excess credit accumulates for future disbursement.
When the employee has a qualified medical expense, they would submit it to you for reimbursement, up to the amount of their HRA balance. You then simply cut a check for the amount of the reimbursement. It's that simple. You count it as a business expense, and your employee pays no taxes on that reimbursement.
Keeping Your Employees Healthy
Most of your employees will incur medical expenses every year, including dental expenses and eye glass expenses. Through an HRA you can reimburse your employees for these expenses with tax-free dollars.
The best businesses are about more than just selling widgets and making money. The more the business cares about the employees and the more the employees care about the business - the more fun we have and the more successful we are. So why not reimburse for preventive benefits like smoking cessation programs, weight loss programs, or even just annual physicals.
The great thing about Health Reimbursement Arrangements is that you are the architect. You get to decide what expenses you will reimburse. You also have the right to exclude part time employees, employees who have worked for you for less than three years, and those under age 25.
How To Establish Your Health Reimbursement Arrangements
When you establish an HRA, all you have to do is furnish a Summary Plan Description to all plan participants. The Summary Plan Description simply describes who is eligible, and the benefit limits that can be reimbursed. For instance, it may list the minimum number of hours they must work, their minimum age, and the number of months they must be employed. It will list the benefit limit for reimbursement of health insurance premiums, out-of-pocket expenses, term life premiums, and possibly other expenses. You must also keep a Plan Document in your files, which documents the same information.
You can have an accountant set up the Health Reimbursement Arrangements, or you can do it online through HSA for America at: http://www.HSAforAmerica.com/HRA-sign-up.htm
The cost is $297 for the first employee, and $97 for each additional employee. Each employee will receive a complete Summary Plan Description, and you will receive login information where you can manage your account.
Each year you can review your program, and adjust the expenses that the HRA will cover if you like. Because we have systemized the process the program is easy, fast, and inexpensive.
A Better System For Employer and Employee
If you have a small business of healthy employees, an HRA may be a no-brainer. Keep in mind that because your employees will be applying for individual health insurance coverage instead of group coverage, their premiums will be much lower but the plans will each be individually underwritten.
Your employees will each get to choose the insurance plan and deductible that best fits their individual needs. Once everyone is approved they will have permanent coverage that is not tied down to their employment. And you can get out of the insurance business, for good.
If you would like more information, see our Additional Benefits page or drop us an email and let us know how we can help.
P.S. - One aspect of human aging is "glycation", the same process that happens when toast turns brown. Next month I'll tell you what causes it, what you can do to prevent it, and I'll let you know about a simple test you can pay for from your HSA that will help you monitor your progress. I may also share some pictures from my family trip to Tulum, Mexico.