In the small group health insurance market, it’s not uncommon these days to see renewals with increases of 20 percent or more. In fact, many groups are thrilled to get medical renewals with less than double digit increases. Health insurance costs are scheduled to rise 5.4% this year (compared to 3.9% inflation) and that trend isn’t likely to end anytime soon. Agents, employers, and benefit coordinators alike are all looking for ways to decrease costs without burdening employees with higher out of pocket amounts. One way to do this is to establish Health Reimbursement Arrangements or Accounts (HRAs). Though they have been around a long time, many employers you come across may be confused about what HRAs are and how they can be used.

HRAs allow employers to self-fund a portion of the plan benefits without taking on too much risk. Employers can decrease premiums without increasing employee benefits by raising the plan deductible and setting up an HRA to pay the difference for those employees who need it. This is especially helpful for groups in which the same few folks are utilizing the plan—and driving up the premium every year—more than the others.

Benefits of HRAs include:

• They are customizable: the HRA can pay first dollar benefits or it can kick in after the employee has paid a certain amount.
• At the end of the plan year, the employer keeps funds that are unused.
• There is no limit to the amount of funds the employer can contribute.
• Distributions are tax deductible for the employer (and are not considered taxable income for the employee).
• The employer sets the limits and knows exactly what the maximum expenses are.
• They made be used in conjunction with other reimbursement plans, such as Flexible Spending Accounts.
• More types of health plans (e.g. traditional copay plans) can be paired with HRAs than with HSAs.

Aspects of HRAs to warn your groups about:

• They can be confusing to employees (and employers), especially if the group is moving from a straightforward plan.
• HRA funds may only be used on substantiated medical expenses, as defined by the government (save your receipts!).
• They are completely employer funded, and the funds cannot come from employee salaries.
• Due to healthcare reform, standalone HRAs that are not paired with a High Deductible Health Plan are subject to restrictions beginning in 2014.

Educate yourself about the benefits and limitations of HRAs. They aren’t a good fit for every group, but they are a good tool to keep in that “premium reduction toolkit” of yours.

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