Employers and the self-employed are using two main strategies to keep the cost of health insurance low and to reduce their taxes. Known as an HSA, a Health Savings Account can make most health care expenses tax deductible, and provide tax-deferred earnings. Individuals and business owners can start an HSA once they purchase a health plan that’s certified to be HSA compatible. These plans are available in the individual market for much lower premiums than plans in the group coverage market.
Can Health Savings Accounts Be Combined With A HRA?
Employers and people who are self-employed if the spouse works in the business may add a Health Reimbursement Arrangement to substantially increase the tax savings available with an HSA alone.
To put it simply, a Health Reimbursement Arrangement (HRA) is an employer-funded medical reimbursement plan for employees. Someone who is self-employed cannot have an HRA in his or her name, but can reimburse the spouse, who works in the business as a W-2 employee, through an HRA. All of the family’s qualified health care and insurance expenses can be reimbursed, and that includes the expenses of the self-employed business owner by virtue of being a member of the HRA-covered family.
The big rush to get HRAs in place by Dec. 31 resulted because the cost of health insurance premiums could then be reimbursed for the whole year back to January 2011. Reimbursement for other kinds of health care is not retroactive, though. Those who start a HRA in January 2012 can reimburse their employees for health care, including premiums.
Since group coverage has become an expensive option for both employers and employees, HRAs present a less expensive choice that can help both parties save on health care costs. Compared to group plan rates, policies in the individual market can save employers up to 50 percent. Certain of these plans, known as Health Savings Accounts, This makes if feasible for more employers to provide health care coverage to more employees. By setting up a HRA, employers can legitimately reimburse their employees for individual health insurance premiums and other health care costs.
How Do Health Reimbursement Arrangements Work?
On a regular basis, an employer contributes a pre-determined amount to an account on an employee’s behalf. The employee can submit a reimbursement request for qualified medical expenses, and such reimbursements are not taxed.
What’s Required To Start A HRA?
The primary requirement is that the plan must be funded solely by the employer. It cannot be funded by salary reduction. In addition, the plan may only provide benefits for substantiated medical expenses.
HRAs may be designed in many fashions to suit the specific needs of employer and employees alike. It is one of the most flexible types of employee benefits plans, making it very attractive to most employers.
How Do Employers Benefit From A HRA?
HRAs are most commonly offered in conjunction with a high-deductible health plan. As a rule, these plans keep premium costs low, so employers can use the savings to fund the HRA. All employer HRA contributions are tax deductible for the employer, and tax-free for the employee.
Employers may establish when HRA funds may be used. This can range from comprehensively covering all health care to a limited plan for emergency room expenses only. Because they are so flexible, HRA plans enable employers to control costs of providing healthcare benefits while providing a valuable employee benefit.
With an HRA, employee healthcare expenditures are visible and clear to employer and employee alike, thereby fostering a greater understanding of the costs of health care. In addition, employees who can monitor and control their health care costs become smarter health care consumers.
Studies show that only 20 to 50 percent of employees actually use their health care coverage, meaning employers often pay health insurance premiums for employees who are not utilizing the coverage. A HRA allows employers to determine the best type of coverage for their employees based on the demographics of their employee group.
HRA plans may also cover retired employees (and their spouses and tax dependents). Employers may wish to consider a HRA as an alternative to more expensive traditional retiree health care options.