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Dos and Don'ts for small business HRAs

by Tony Novak, CPA, MBA, MT     September 23, 2013


Health Reimbursement Arrangements (HRAs) have emerged as the best way for a small business or nonprofit to reduce the cost of providing health benefits to employees in the post-health-care-reform era. When the federally subsidized health insurance exchanges open by the start of 2014 these HRAs will gain even more momentum. The concept is simple: each employee uses the health care and resources that best suit their own unique situation and the employer helps pay the expense of those care costs on terms that are controlled by the employer. The employer typically decides how much to contribute and allows the employee to access the health insurance exchange to find the best coverage and supplemental benefits.

For most small businesses, the challenge is how to most efficiently set up the HRA plan with the exact features they want at a cost they can afford. Cost ranges from as little as $150 per year up to several thousand dollars. This short article lists some of the best practices and those to avoid when setting up a HRA.

Do this:

  1. Keep it simple. If you can't explain the purpose of your company's HRA benefits in a sentence, then additional planning it probably warranted.
  2. Use a written plan document. Tax law requires that the employer communicate the benefits in writing. A plan designed by a benefits professional with experience in your industry is preferred.
  3. Have proof of authority. A corporation should keep a log of signed corporate resolutions.
  4. Make communications clear. A well-written Summary Plan Description helps prevent misunderstandings.
  5. Keep it affordable. Keep the benefits at a level the business can sustain. Keep administrative expenses to a minimum.
  6. Combine with other voluntary employee benefits. HRAs work great in combination with Section 125 flexible benefit plans or Health Savings Accounts.
  7. Give employees direct access to professional help. This improves satisfaction and helps to avoid miscommunications.

 Don't do this:

  1. Include owner/employees of unincorporated businesses, partners or members of an LLC. HRAs are intended for common law employees and other types of health benefit plans better serve owners and self-employed members. (See the resource below).
  2. Buy bundled services. Some companies offer HRAs just to lock employees into using their insurance, exchange or payroll system.
  3. Allow employees to contribute. This invalidates the HRA tax benefits.
  4. Self-administer employee medical claims that contain personal health information. Either design the plan to side-step this issue (the preferred approach for small firms) or contract with a third party claim administrator.
  5. Use an older HRA plan in 2014. Most HRAs need to be updated to qualify as "special purpose HRAs" under the post health care reform rules.

Freedom Benefits offers small business HRA setup for a flat fee of $150 that includes help with the design, forms and payroll integration. Most plans can be started within 2 business days of the request.

Related resources:

25 reasons that small businesses choose health reimbursement arrangements
HRA plan design approved by IRS
HRA plan helps owner/employees
HRA plan overview
HRA plans for small businesses
HRA vs. HSA: Which is best for me?
IRS approves new HRA plan design
MSAs, HRAs and HSAs: which health plan is right for my small business

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 Opinions expressed are the sole responsibility of the author and do not necessarily represent the opinion of Freedom Benefits Association or any other person, company or entity mentioned. Tony Novak operating under the trademarks "Freedom Benefits", "OnlineAdviser" and "OnlineNavigator" is not an agent, broker, producer or navigator for any federal, state or commercial health insurance exchange but may be compensated as an accountant, adviser, consultant, reviewer, endorser or referrer to any firm or product named. Information is from sources believed to be true but cannot be guaranteed.