Most employers are aware of how important it is to provide employees healthcare. Many times, an employer helps by purchasing the best priced insurance plan they can find and leave it at that.
In most cases, employers don’t want to overspend, especially on healthcare. After all, 50% of employees account for only 3% of the actual costs. Because of this, many employers opt to reimburse when healthcare is actually used.
Health Reimbursement Arrangements (HRAs) are one way to accomplish this. Some key details surrounding HRAs include:
- Group Plan Required – a group health plan is required for HRAs
- TPAs – third party administrators (TPAs) are used to keep the HRA compliant and efficient
- Rules – employer determines what types of medical services can and cannot be reimbursed
- Conflicts – HRAs do not conflict with FSA or HSA dollars
Employers can use this tool to better manage healthcare expenses, improve overall coverage, and lower total risk of the group. Here is a highlight of the top 5 ways to use HRAs:
1. Flat or Split
Employers can offer HRA reimbursements as a flat amount or a split percentage of medical bills.
For example, if the reimbursement is set up as a flat amount of $1,000, and the employee incurs an expense of $500, the whole bill is paid through the HRA. The employee would be able to continue to receive reimbursements until the $1,000 limit is reached.
However, if the reimbursement is set up as a percentage, such as an 80/20 split, then the employee would pay 20% of that $500 bill. Meaning, the employee would pay $100 (20%) and the employer would pay $400 (80%).
In both scenarios, the limit can be whatever the employer determines; the employer’s designated TPA will track and report these balances.
2. Frontend or Backend
Once the employer determines a flat or split method, they need to choose whether to offer the reimbursements on the frontend or the backend of the employee’s requirement.
For example, the employer wants the employee to cover $2,500 of their $5,000 deductible. The employer can either pay the first $2,500 or the last $2,500. Frontend HRA funds are available from the start of the plan year.
However, for most employers, a backend HRA approach is often a better solution rather than a frontend HRA. Backend HRAs ensure employees are still responsible for some of their healthcare costs, and they are used less than frontend. Whichever method is chosen, both lower overall risk.
While backend HRAs do statistically keep usage down, they can feel like less of a benefit for the employee. That’s why some employers utilize a “leapfrog” strategy. “Leapfrog” essentially means the reimbursements are set up in sections that “leap” back and forth.
Looking back at our example of the employee with a $5,000 deductible, using a “leapfrog” strategy would mean the first $1,250 would be covered by the employer, the second $1,250 by the employee, and the pattern would continue until the $5,000 deductible was met.
This method can feel confusing for the employee and difficult to track as bills are processed, so we generally do not recommend this strategy. Remember, enhancing the user experience can never be underrated!
4. The Hybrid
In contrast with reimbursements, HSA and FSA dollars are spent directly by the employee using a debit card. HSA dollars can be saved up and rolled over each year, but FSA dollars are generally use-it-or-lose-it.
FSA dollars are owned by the organization and are 100% available from the start of the plan year. Similar to frontend HRAs, while helpful to the employees, this method generally does not lower expenses.
HSA dollars, however, are owned by the employee. Even when contributions are made by the organization, those dollars are saved in the employee’s personal savings account and kept even after employment ends.
HSA dollars can be provided in a lump sum at the start of the plan year, or given in monthly amounts. Even if given on the frontend, employees often spend much less because it’s their own money.
Using frontend HSA contributions to help with out-of-pocket expenses and lowering overall exposure with a backend HRA is the hybrid strategy that provides employees with great coverage at a manageable cost for the organization.
The final HRA we’ll highlight is the Individual Coverage HRA (ICHRA). This unique version became available starting January 1, 2020, following an executive order from President Trump modifying their rules.
An ICHRA allows employers to provide tax-free dollars not only for medical expenses, but also for health insurance premiums. Employees can then shop the Individual Marketplace with their provided allowance.
While an ICHRA does offer increased flexibility, it is still limited. Employees cannot use ICHRA dollars toward sharing programs or receive tax credit discounts, unlike the flexible wage increase model.
If you are an employer interested in rethinking your health benefits, you can cut costs while still taking great care of your team! Connect with one of our benefits consultants, we’d be more than happy to help you.