By offering a stand-alone health reimbursement arrangement (HRA), any small business can afford health insurance that helps recruit and retain key employees. How? With a stand-alone HRA, a small business offers employees a tax-free HRA allowance to purchase their own individual health insurance and other medical expenses. A stand-alone HRA is like a business expense account for health care.
So what is the cost of a stand-alone HRA? If a small business wants to contribute any amount to employee health benefits, they can afford the cost of offering a stand-alone HRA.
A Quick Overview of Stand-Alone HRAs
First, it is important to understand the basics of a stand-alone HRA. The general concept is that a small business gives each employee a fixed dollar amount (an HRA allowance) that employees choose how to spend. Employees are typically allowed to use their HRA allowances for individual health insurance costs and other medical expenses, such as doctor visits and prescription drugs. A stand-alone HRA is also known as a defined contribution health plan.
To summarize, with a stand-alone HRA a small business:
Cancels a group health insurance plan (if they have one)
Budgets any amount for health benefits
Uses HRA Software to give each employee a fixed dollar amount to use on medical expenses
Employees purchase their own individual/family policies, and choose how to spend their HRA allowance. (Most small businesses also select an insurance professional to give employees a resource in selecting a plan.)
The small business reimburses employees tax-free during payroll (up to the amount of the employee's HRA balance)
Note: A stand-alone HRA is different than an integrated HRA (a supplement to a high-deductible group plan). This article focuses 100% on stand-alone HRAs.
What is the Cost of a Stand-Alone HRA?
The cost of a stand-alone HRA is completely set by the small business. If a small business wants to contribute any amount to employees' health care costs, the small business can afford a stand-alone HRA.
To calculate the cost of a stand-alone HRA, the small business follows three simple steps:
Monthly or Annual Budget: Set an overall budget the small business can contribute to employee health benefits. For example, if the annual health insurance budget for a 10-person business is $12,000 then the monthly budget is $1,000.
HRA Allowance Amounts: Within the overall budget, back out employees' HRA allowance amounts. Following the example above, take the monthly budget of $1,000 and divide by the number of employees (10). This business's HRA allowances are $100 per employee.
Tip: The HRA allowance amounts don't need to be evenly divided. This small business (with 10 employees) could provide different amounts by class of employees. For example, they could provide $150/month to the two managers, and $88/month to the eight retail associates.
HRA Administration Fees: Factor in HRA Software or Administration fees. Fees will vary by HRA administrator, but are usually charged as a one-time set up fee and per employee per month "PEPM" fee. As needed, adjust employee allowance amounts to stay within your overall budget.
Budgeting the cost of an HRA is quite simple. Because there are no minimum or maximum contribution amounts with a stand-alone HRA, the small business truly defines and controls all costs of their health insurance benefits.