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A Health Reimbursement Arrangement (HRA) is an employer-funded plan that reimburses employees for incurred medical expenses that are not covered by the standard company insurance plan. Because the employer funds the plan, any distributions are considered tax deductible (to the employer). Reimbursement dollars received by the employee are generally tax free. Typically, a third party administrator handles all the details and provides the employer with up to date figures through their website.
As medical insurance premiums continue to rise, employers are seeking ways to retain richer benefit levels with alternative methods of funding them. The selected plan typically has a high deductible with a greater out of pocket maximum and thus a lower premium. An HRA is then implemented to pay claims underneath the deductible to the maximum selected. Since the number of participants that will actually hit their deductible will be few, the employer can pay more of the individual deductibles and come out ahead. Many small to medium size businesses can realize a 25% to 40% savings.
Let's look at an example. Company A has 35 employees and pays a group policy fee of $200,000 per year or $5,714 per employee for a traditional plan. There is a $500 deductible and a 20% coinsurance on the first $10,000 for a maximum out of pocket exposure to the employee of $2500. Now we put together a new Group HRA plan that raises the deductible to $5,000 per employee with the new group premium dropping to $100,000. The coinsurance fee is eliminated and the company allocates up to $3,500 per employee towards the deductible. This essentially caps the employee's out of pocket risk to $1,500 (a $1,000 savings for the employee). Meanwhile, assuming that 14 employees (40% of 35) exceed the $1500 deductible and hit the $5,000 maximum deductible covered in the policy, the company could be paying up to $49,000 in HRA contributions (14 x $3,500). The good news is the employer just saved $51,000 while reducing the out of pocket exposure of its employees by $1,000. Plain and simple, a win-win for both the employees and the employer.
The employer can specifically design the HRA to meet the needs of the employees. For example, in the previous illustration the company decided to cover the higher deductible imposed on the employees in return for a lower premium. But the plan can also be designed to cover vision and dental coverage. In fact, the employer can set up these benefits as a stand alone program that is independent of the existing plan. This would be classified as an unlinked HRA.
By adjusting health insurance coverage, implementation of an HRA plan can generate a savings in overall health benefits for the employer and employee. The employer's expenditures for health care are visible to the employees, which can improve employee morale and loyalty. One key solution to the rising costs of health care is to put more choices in the hands of consumers. By doing this, employees search for the most effective and cost efficient care and can purchase insurance coverage that best meets their needs. Employers can recruit and retain quality employees. Current and prospective employees view an employer in a positive light when a benefit package is being provided with the employee's interest in mind.