High-Deductible HRAs - A Way to Encourage Employees
HRAs are individual health reimbursement arrangements that employers can establish to pay employees’ medical expenses. HRAs must be set up by an employer on behalf of its employees, and only the employer can contribute to an HRA. HRAs became prevalent after June 2002, when the IRS issued a ruling to clarify their treatment in the tax code. There are many different types of HRAs, and a popular type is referred to as a high-deductible HRA.
High-Deductible HRAs—A Way to Encourage Employees to Adopt High-Deductible Insurance
High-deductible health insurance:
- Can be better for a company because it may save thousands per employee on the premium for their group health plan
- Can be better for employees because they get to choose their medical providers and their type of treatment
- Can be less expensive for most of the employees since the cost is typically less than their out-of-pocket, below-deductible medical expenses
Why Don’t All Employees Choose High-Deductible Plans?
Many employees have received low or no-deductible health coverage from their employer for their entire life. It will take time before some of these employees accept high-deductible health insurance despite the fact that they can save money immediately by switching to a high-deductible policy.
When it comes to healthcare, many healthy employees do not worry about developing an illness—they worry about themselves or a child having an accident costing thousands of dollars in medical expenses. This is one of the biggest reasons that people don’t choose high-deductible health insurance, even when it would clearly save them money.
Another reason people don’t choose money-saving high-deductible health insurance is the fear of a specific disease, like cancer, that may have plagued one of their parents. Of course, cancer and every other specific disease are covered by high-deductible plans, but employees sometimes feel less secure with high-deductible plans, for purely emotional reasons.
Another reason that some people reject high-deductible coverage that would save them money is dental benefits—they simply don’t want to pay out-of-pocket dental expenses regardless of how much more it costs them in premium. This same is true for vision benefits and many other specific medical items.
The solution is a high-deductible HRA that offers first-dollar coverage of $1,000 a year or more for all of these items. Employees incur these expenses and send their receipts to a third-party administrator (TPA) for reimbursement. Any unspent amounts each year are carried forward to be used in future years, but forfeited if the employee leaves the company.
How High-Deductible HRAs Save Employers Money
Let’s assume the current annual deductible on a group plan is $1,000 and the employer wants to raise this deductible to $5,800 so their employees can qualify for HSAs and make the maximum HSA contributions. The insurance carrier would probably lower the group premium by about $1,500 per employee for this large an increase in their deductible.
To make this change acceptable to the employees, the employer offers each employee a $1,000 per year high-deductible HRA in combination with the new high-deductible health plan. The high-deductible HRA pays 100 percent of all medical expenses up to $1,000 a year, with unspent amounts carried forward for future years.
Roughly 80 percent of your employees consume less than $1,000 a year in healthcare—these employees would immediately get up to $1,000 a year improvement in their health benefits, and the company would save $500 in health premiums plus any unspent HRA amounts. Among the remaining 20 percent of employees who consume more than $1,000 a year on healthcare, those who consume $1,000 to $2,000 would also benefit, while those who consume $2,000 to $5,800 in healthcare would have out-of-pocket expenses up to a maximum of $3,800.
Note: This should not be taken as legal or tax advice.