When evaluating Health Reimbursement Plans, there are pros and cons to consider for your company and employees. This section outlines pros and cons of Health Reimbursement Plans.
Health Reimbursement Plans offer several advantages to both the employer and the employees.
1. Cost Control: With Health Reimbursement Plans, the company sets and controls the cost of health benefits. Unlike traditional group health insurance, there are no minimum contribution amounts. Additionally, the company owns the allowance funds and the benefits are entirely employer-funded. Reimbursements are only issued to employees once they show proof of their expense. And, when the employee leaves the business, any unused funds generally stay with the business.
2. Cost Savings: Individual health insurance plans, on average, cost 20% - 60% less than group health insurance plans. Eligible employees are able to access discounts on their health insurance with the federal premium tax credits. And as an additional cost savings to employees, reimbursements are generally excluded from employees' gross income.
3. More Time: Health Reimbursement Plans reduce the administration time of health benefits. Using the right Administration Software, managing health benefits takes 5 minutes per month online.
4. Tax Savings: By using a tax-preferred Health Reimbursement Plan, the company realizes tax savings. Employers can deduct reimbursements as a business expense, and exclude them from wages subject to FUTA (0.8%) and the employer portion of FICA (7.65%).
5. Recruiting & Retention: Many small businesses struggle to afford group health insurance, or cannot meet participation requirements. Offering a Health Reimbursement Plan allows companies to offer (and advertise) health benefits when recruiting key employees. It also shows employees that the business cares about employees' healthcare.
6. Choice of Any Insurance Plan: With Healthcare Reimbursement Plans, employees choose the individual health insurance plan best for them, including which network of doctors. Employees can choose from any carrier, and any type of plan (HMO, PPO, HDHP, etc.). Employees can purchase a plan through the new Health Insurance Marketplaces, through a broker, or directly from an insurance company.
7. Insurance Plan Portability: Employees are purchasing individual health insurance plans. Since individual health insurance plans belong to the employee (not to the small business), the plan stays with employees if they leave the business.
The cons of Health Reimbursement Plans and individual health insurance reimbursement are:
1. Change in Benefits Administration: Offering a Health Reimbursement Plan is a different approach for some employers and employees. As such, some employers perceive administration as a con of offering a Health Reimbursement Plan. With the wrong administrator this can be true. What's the workaround? Use an online administration software to alleviate this. With the right HRP software, administration takes 5-10 minutes a month.
2. Limited Tax Benefits for Some Owners: Some types of business owners receive limited tax benefits from reimbursements. Read more on owner participation in Section 105 Plans, including HRPs.
3. Employer Must Comply to Avoid Costly Fines: A Health Reimbursement Plan is a group health plan and it is subject to compliance with IRS, ERISA, HIPAA, ACA Market Reforms, and other applicable rules. As such, some employers perceive compliance as a con. To make sure your arrangement is compliant, and to make compliance easy, use a software administrator.