HRA: The Key to Cutting Costs

Stephanie Dwilson

HRA: The Key to Cutting Costs

A health reimbursement account (HRA) might be your secret weapon for cutting down your small business’ health care costs. HRAs provide tax benefits to employees and the employer while making it easier for your employees to get the health care they need. Many times, the only reason business owners don’t add HRAs as a benefits option is because they don’t truly understand how HRAs work.

What Are HRAs?

An HRA is defined by IRC 105, according to Cornell Law School. HRAs are similar to health savings accounts except they’re funded solely by the employer. Employers put aside money every year, which is used to reimburse some of their employees’ medical expenses.

Employers contribute what they want to the plans and define exactly what type of medical expenses the funds will reimburse. HRAs typically reimburse qualified expenses, such as co-pays, premiums, deductibles, medical or dental services. Funds that aren’t used roll over from year to year. Employers can limit HRA reimbursements to employees themselves or include their spouses and dependents. They work in conjunction with any qualified insurance plan, not just high-deductible plans like HSAs.

In December 2016, Congress passed a bill allowing small businesses with 50 or fewer employees to also have HRAs, the Society for Human Resource Management explained. These small business HRAs have a few additional requirements, including an annual maximum reimbursement of $4,950 per individual and $10,000 per family. Employees must be offered the same terms throughout the company, and employees’ ACA tax credits may be reduced according to how much they participate. In addition, reimbursements used for insurance that doesn’t meet the definition of “minimum essential coverage” will count as income, Forbes noted.

How Do HRAs Help Small Business Costs?

HRAs bring many advantages to both employers and employees. First, all reimbursements that employers make through the HRAs are tax-deductible and aren’t subject to payroll taxes. Employers can enjoy more savings if they use HRAs in conjunction with high-deductible health plans, which have lower premiums every month. And as long as HRAs are used for qualifying medical expenses, the employee receives the reimbursement tax-free, too. In addition, all the contributions that employers make can be excluded from employees’ gross income.

There are a few additional hidden benefits that you might not immediately recognize, according to the Total Administrative Services Corporation. HRAs can be used for retired employees and may be a better choice for businesses than traditional retirement health care. And with HRAs, employees’ health care costs are highly transparent to both the employee and employer. This can help employees make smarter health care decisions and better utilize the health care coverage that they’re already paying for. And healthier employees lead to an overall healthier business.

An HRA can be smart choice for a business owner, providing both cost and business benefits. Talk to your health care broker about whether this might be a good option to offer to your employees.

Stephanie Dwilson has extensive experience providing expertise on topics including health, law and marketing. She’s a science journalist published by Fox News, a marketing expert and a non-practicing attorney with experience in personal injury law. She’s also a small business expert featured by Businessweek and has worked as a PR lead for one of the largest churches in America.