Question: My broker has presented an HRA option that will save me quite a lot of money on my company's group health benefits next year. Is it worth the change? What are the pitfalls?
Answer: The advantages are great and the disadvantages small. However, I will caution you that communicating the benefits to your employees is perhaps the most important step in making an HRA strategy pay off for your company. Here's a list of pros and cons:
Advantages of HRAs for employers include:
Reimbursements of qualified claims are tax-deductible for the employer.
Employers know their maximum expense related to their health care benefit.
Advantages of HRAs for employees include:
Contributions that employers make can be excluded from employees' gross income.
Reimbursements may be tax free if the employee pays qualified medical expenses.
Unused funds in the HRA can be rolled into future years for reimbursement.
HRAs may be offered in conjunction with other employer-provided health benefits including Flexible Spending Accounts (FSAs).
Employees do not have to be covered under any other health care plan to participate, unlike (for example) a Health Savings Account (HSA) which requires a High Deductible Health Plan.
Employees can be reimbursed for a health care plan that meets their or their families' specific needs, as opposed to a standard company plan.
Disadvantages of HRAs
HRAs must follow "a variety of statutory rules and provisions" including the COBRA continuation coverage requirements, ERISA, and HIPAA.
HRA plans are considered "Primary Payers" subject to Medicare Secondary Payer (MSP) mandatory reporting requirements.
Self-employed persons are ineligible.
Highly compensated participants may be subject to certain limitations.