With the cost of health care on the rise, your business may not be able to afford an insurance plan that covers 100% of employee costs. In fact, you might not even be able to provide a plan at all.
If you have some extra budget to help out your staff, but not enough to fully build out comprehensive benefits, one way to fill the gap is with small business health care reimbursement through an HRA.
Here’s how these accounts could make life more affordable for your staff and your company alike.
The Benefits of Health Reimbursement Accounts
In a health reimbursement account (HRA), employers put money aside for employees during the year. Only you, as the employer, can add money to an HRA — the employees themselves cannot. When the employee pays for a covered health care expense, they can show your HR decision-maker their receipt and then get a reimbursement from their HRA balance.
For the employee’s part, they won’t owe income tax for receiving this small business health care reimbursement. For yours, you won’t owe payroll taxes. Additionally, your business will be still be able to deduct whatever you pay into the HRAs. This makes it a more tax-effective tool than just offering employees extra salary for their health care expenses.
Beefing up your health insurance coverage with an HRA also has the potential to boost employee hiring and retention efforts: Workers rate better health insurance as the most valuable perk out of all types of employee benefits.
That’s unsurprising, considering that over half of Americans have had to delay or skip medical treatment because of a lack of funds. Having to choose between forgoing treatment and accepting the financial stress of large medical bills can hurt your employees’ long-term health and lead to more expensive health costs down the line; when employees know they can have those bills reimbursed, they may be more willing to get the care they need.
Types of HRAs
There are several versions of the HRA. Each has slightly different rules concerning eligibility, contribution limits and what expenses it can cover. There is also a one-person standalone HRA — but, as the name indicates, this account only covers one person. In 2019, there are currently two HRAs that work for companies with multiple employees:
- QSEHRA. If your business does not offer employee health insurance, you can still give them tax-free financial support through a qualified small employer HRA (QSEHRA). You can only use this account if your business counts as a small business under the Affordable Care Act (ACA), meaning you have fewer than 50 full-time equivalent employees. If so, the IRS says that you can put aside up to $5,150 per employee without a family and up to $10,450 per year for an employee with a family.
- Group coverage HRA. If your business does offer a group health insurance plan, you could set up a group coverage HRA. Businesses of any size can set these accounts up, and there’s no limit to how much you can put aside per year for employees. Employees can only use these accounts if they are enrolled in your group health insurance plan.
Be prepared for these options to change, since the HRA market continues to evolve. The government has announced two slightly different versions set to begin in 2020. However, these accounts will follow the same framework: One will be for companies that don’t offer health insurance, while the other is meant to be paired with a group health insurance plan.
Eligible Employee Expenses
Employees can use the money in a QSEHRA to cover their health insurance premiums, deductibles and copays. Those same funds can also cover the cost of other health-related treatment — including acupuncture, psychiatry and dental work — as well as eyeglasses, contacts, prescriptions, diagnostic testing products and other medical supplies. Before reimbursing an employee expense, carefully check their receipt to confirm the purchase.
For your employees to be eligible for the tax-free reimbursements under the QSEHRA, they must have their own health insurance that meets the minimum coverage standards under the ACA. You will need to verify this coverage for each employee. If an employee does not have their own coverage, they can still receive money from the QSEHRA, but it will count as taxable income for them.
The group coverage HRA works in nearly the same way, with one main difference: It can’t reimburse individual health insurance premiums. But since employees must be on your group health insurance plan to use the HRA anyway, they should not need to buy their own health insurance.
What to Do With Unused Funds
Your business has ownership of the HRAs — not the employees. If an employee doesn’t spend all the money in their account by the end of the year, you can decide whether that money will roll over to be used the next year or gets forfeited back to your organization.
If an employee leaves your company, they don’t get to keep the unused money in the HRA; it stays with your company. However, you should establish a grace period of about 90 days after the employee leaves to make sure they don’t submit any last-minute receipts from when they were still working for you.
Employees look to you for many things — opportunities for advancement, professional development, a supportive work environment. Health and financial stability are both factors, and your staff will appreciate all the extra help they can get with their health care expenses. Using an HRA gives you flexible and financially effective way to do just that.
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This content is provided solely for informational purposes. It is not intended as and does not constitute legal advice. The information contained herein should not be relied upon or used as a substitute for consultation with legal, accounting, tax and/or other professional advisers.