When evaluating Health Reimbursement Accounts, there are both pros and cons to consider for your business and employees. In this section we’ve outlined pros and cons of Health Reimbursement Accounts.
The four main pros of Health Reimbursement Accounts (HRAs) are: flexibility, control, cost/tax savings, and employee recruiting and retention.
Flexibility: HRAs are extremely flexible for employers - you can design the HRA in a variety of ways to meet your budget, health benefit, and hiring needs. For example, employers decide the amount to contribute to employees' HRA allowances, what types of medical expenses to reimburse, and what happens to the funds at the end of the year. As long as the HRA is in compliance, there are many plan design options available.
Cost Control: With HRAs, the employer owns the HRA funds and the HRA is entirely employer-funded. HRA reimbursements are only issued to employees once they show proof of a valid medical expense. Additionally, when the employee terminates employment, any unused HRA funds generally stay with the employer.
Cost/Tax Savings: Using an HRA reduces the amount of FICA and FUTA tax an employer pays. Employers can deduct HRA reimbursements as a business expense, and exclude them from wages subject to FUTA (0.8%) and the employer portion of FICA (7.65%). Additionally, employees save 20-40% on medical expenses by using pre-tax dollars rather than after-tax dollars. And, HRA reimbursements are generally excluded from employees' gross income.
Recruiting & Retention: Many businesses struggle to find affordable health insurance. Because of the cost savings and predictability, HRAs help employers offer more robust health benefits. This is a big bonus for recruiting and retaining key employees.
The two main cons of Health Reimbursement Accounts (HRAs) are: a change in benefits administration and limited tax benefits for some owners.
Change in Benefits Administration: Offering an HRA is a different approach for some employers. As such, some employers perceive HRA administration as a con of offering an HRA. With the wrong HRA administrator this can be true. What's the workaround? Use an online HRA software to alleviate this. With the right HRA software, HRA administration takes 5-10 minutes a month.
Limited Tax Benefits for Some Owners: Some types of business owners receive limited tax benefits from HRA reimbursements.