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April 09, 2007
Health Savings Accounts and HRA Plans for Small Business Owners
With group health insurance rates continuing to rise, more small business owners are turning to Health Savings Accounts combined with a Health Reimbursement Arrangement (HRA) as a way to help their employees obtain health insurance. With this type of arrangement, the business reimburses employees for the cost of their individual health insurance plans, instead of offering a group plan. Employees end up with less expensive, permanent coverage that they can take with them if they ever leave the business thanks to their Health Savings Account plan.
What Is an HRA?
A Health Reimbursement Arrangement (HRA) is simply an arrangement where an employer reimburses employees tax-free for qualified medical expenses, including health insurance premiums. HRAs are also known as Section 105 plans, named after the section in the U.S. Tax Code that governs them.
Group health insurance is “guaranteed issue,” meaning that the insurance companies must accept any applicant, regardless of pre-existing health conditions. As a result, group insurance premiums are about twice as expensive as individual plans, and approximately 40% of small business owners can no longer afford to offer health insurance to their employees.
Companies cannot purchase individual health insurance for their employees, but if they have an HRA set up they can reimburse them for their medical expenses, including the cost of health insurance. The reimbursement is considered a tax-free fringe benefit to the employee, so it is a much better value than simply receiving a pay increase.
Because some companies are now offering online HRA plan set up, they are also now extremely easy to set up and to manage. The employer simply provides a fixed monthly tax-free contribution to an HRA for each participant. The HRA then enables employees to obtain reimbursement for qualifying medical expenses, including health insurance premiums.
Your employees can then select an affordable plan customized to their own needs and budget. One great advantage to the employee is that the coverage is totally portable – if they ever leave their employer they can take the coverage with them. They do not have to worry about COBRA, or about being tied down to their job just because they need the health insurance.
These plans are primarily being adopted by small companies with employees who are all in good health. Because insurance companies are allowed to “underwrite” individual health insurance applications, someone with some pre-existing health problems could be denied coverage.
The average group health insurance premium for a family is nearly $14,000 per year. However, the average premium of an individually underwritten plan can be less than $300 per month. So it is not surprising that as more small business owners learn how they can use an HRA to reimburse individually underwritten health insurance plans, their popularity continues to soar.
Learn more about Health Reimbursement Arrangements and Health Savings Accounts at: http://www.Health--Savings--Accounts.com
Posted by Wiley Long at April 9, 2007 09:35 AM
Comments
I don't believe you can have an HRA reimburse an employee for medical insurance premiums and still have that employee be eligible to contribute to an HSA. If you look at the list of "permitted insurance" under the IRS's HRA/HSA coordination guidelines, you will not see "health insurance" or anything like a standard health insurance plan. It's possible the IRS publications are wrong, but it's hard to go wrong during an audit by pointing to an IRS publication.
Posted by: Bob Smith at April 9, 2007 11:27 AM
Hi Bob,
This is a common misperception. In fact, you can use an HRA to reimburse health insurance. To avoid invalidating the HSA, the HRA can only reimburse for expenses that would not otherwise apply towards the deductible of the qualifying high-deductible health plan. So you could reimburse for preventive expenses, health insurance premiums, pre-paid dental plans, life insurance premiums, and other similar expenses. You could not reimburse first dollar coverage that would apply toward the deductible. See IRS publication 969, or the book The New Health Insurance Solution, by Paul Zane Pilzer. You may also want to order our special report on HRAs. See: http://www.HSAforAmerica.com/hra.htm
Posted by: Wiley Long at April 11, 2007 12:07 PM
So you're saying that an employee who is beneficiary and owner of an individual HDHP, can receive reimbursement for said HDHP's premiums from their employer's HRA and still remain eligible to contribute to (or receive an employer's contribution to) an HSA?
Publication 969 is very confusing and poorly written if that's the case. I'm not surprised that this misconception is common. The sentence in 969 stating "an employee covered by an HDHP and a health FSA or an HRA that pays or reimburses qualified medical expenses generally cannot make contributions to an HSA" strongly implies that, since HDHP premiums are themselves "qualified medical expenses", the HRA cannot reimburse for HDHP premiums and still leave the employee HSA eligible.
Posted by: Bob Smith at April 11, 2007 08:21 PM
"The sentence in 969 stating "an employee covered by an HDHP and a health FSA or an HRA that pays or reimburses qualified medical expenses generally cannot make contributions to an HSA" strongly implies that, since HDHP premiums are themselves "qualified medical expenses", the HRA cannot reimburse for HDHP premiums and still leave the employee HSA eligible."
I think you are mistaken. HDHP premiums are "qualified medical expenses" for IRS 1040 Tax deduction purposes if you itemize deductions and only if they along with your other "qualified medical expenses" exceed 7.5% 0f your AGI not for HAS reimbursments. The only exception to this rule is if you are drawing unemployment. Then the HDHP premiums are "qualified medical expenses" for HSA deductions. Untill you are receiving unemployment they are not "qualified medical expenses" able to be withdrawn from the HSA.
Thats how Im reading it. It would be interesting to see exactly what the IRS rules are on this in plain english.
Posted by: Anthony Picallo at April 13, 2007 12:06 PM
Bob,
Yes, I agree this is confusing. Federal law does allow qualified HSA health benefits to offer first-dollar (no deductible) coverage for certain items including health insurance premiums, expenses resulting from accidents, preventive care, annual physicals, mammograms, PSAs, vision, and dental expenses. Premiums are not considered a “qualified medical expense” under an HSA, which is why you cannot use money from your HSA to pay your health insurance premiums.
So your HRA can reimburse for those expenses. Sometimes this is called a “limited purpose HRA”. It is also sometimes known as a Jennings HRA, a trademarked name by a financial planner named Bob Jennings, who teaches continuing education courses on the topic.
Posted by: Wiley Long at April 13, 2007 01:20 PM
If HRAs can reimburse for premiums and not affect HSA eligibility, then you may want to fix your own materials on the subject (both special reports). They also imply, by omitting general health insurance premiums from the list of permitted HRA reimbursements in a coordinated HRA/HSA plan (they only list premiums for certain special-purpose insurance plans), that HRAs can't pay your HDHP's premiums.
Posted by: Bob Smith at April 17, 2007 03:53 PM