Small Business Health Insurance

7 Disadvantages of Using a Health Reimbursement Account – HRA

August 7, 2011 By Mike Sheeran

I often talk about the many advantages of using a HRA for your business because of the potential savings and flexibility. Today, I want to mention a few potential disadvantages of using health reimbursement accounts. I still have no reservations in recommending these setups, but to be fair, I will go over some things that can come up with these types of plans.

As a reminder, a HRA is a strategy that employers can use to reimburse employees, tax free, for chosen medical services. The usual setup is to purchase a high deductible health plan and then reimburse employees for their services. The funding levels are very flexible and you can design the reimbursement levels almost any way you wish. Potential savings can be up to 30%.

Potential Disadvantages to Using Health Reimbursement Account

1)HRA Plan Setup

The first potential issue is actually setting up the HRA plan properly. I don’t recommend any small company doing this on their own so you must seek out a third party administrator to handle claims and handle the plan document setup. The typical charge for these services may be around $1,000 – $2,000 per year for a small business. That being said, if you only have 2-3 employees, the extra cost may wash away any potential savings. (I will be doing a future post on why you should not self administer)

The administrator will handle plan documents, non-discrimination testing and all other services to make sure your plan is set up properly according to the IRS.

2)Substantiation Requirements

The IRS has strict rules regarding anything that has potential tax savings, so you must substantiate every claim that gets reimbursed. That means you must have a receipt and/or EOB for every claim to prove it was a qualified medical expense. If you cannot provide proof, you are setting yourself up for a lot of problems should you ever be audited.

3)Additional paperwork and ID Cards

This goes along with number 2 and adds a little. Since this is essentially another health plan, we have extra enrollment forms and possibly debit cards that can be used to pay for services(TPA’s will often issue debit cards that employees can use to pay for their medical services). More forms and cards mean a little more work for everyone, but nothing to be too concerned about.

4)First year claims exposure

HRA plans run calendar year regardless of what your underlying health insurance is.

-Health Plan renews every July 1 for your company – you also decide to start the HRA July 1 this year

-HRA year 1, will run July 1 to Dec 31 .

-HRA year 2, will run Jan 1 to Jan 31.

Why this matters is this. You pledge that you will pay the full deductible for all of your employees. This first year you could potentially pay the deductible for everyone between July and December and then be on the hook again to pay it again next year from Jan 1 to Dec 31.

***HRA Plans can be discontinued under a worst case scenario

For the possible first year claims issue, you have be careful how much you pledge, especially if your plan renews late in the year. Also, depending on your initial premium savings, this may or may not be an issue. It may end up meaning you don’t save quite as much as initially planned. (If you save $60,000 and you pledge up to $30,000, then the worst case scenario is you save $0)

5) Cash Flow Issues

If you have decided to fund an employee’s full deductible or pay the first $1,000 or whatever the amount is, you have to make sure the money will be available when needed. If you start the plan on July 1, there is always the chance that three of your employees are going to need the money right away. If you have more employees or want to fund a larger amount, the amount needed can grow pretty quickly.

***Once you get through the first few months, you will have a good buffer from your premium savings to pay for claims.

6)Employee Complaints

Using an HRA will be a different experience for everyone so you are bound to get some complaints. This is normal for almost all plans, but anytime you ask an employee to do more paperwork, there is always the potential for some pushback. The HRA is usually a much better setup for the employees any way though, so once they get over the reimbursement process, they will love the plan.

7)Eligible Employees

Unfortunately, self employed business owners, partners in partnerships, members of LLC’s and 2% shareholders of S-Corporations may not participate in the HRA. ****At least on a tax free basis – speak to your accountant for specific rules.

So there you have it. Those are the six “big” issues in setting up and maintaining a HRA for your business. It may be a little extra work for everyone, but if you can save 30% on your premiums I think it is well worth it.

We have seen companies save nearly $30,000 with only 10 employees enrolled in the health plan. If you are an insurance/tax/legal professional and can add anything to the list, I welcome any information and will gladly update the post.

New Jersey Small Business Health Insurance -Top Five Ways To Get the Best Deal

August 6, 2011 By Mike Sheeran

For most New Jersey small businesses, health insurance can be one of the largest expenses they incur, second to employee payroll. It is also the one expense that seems to go up every year, without fault of the employer or its employees. Because of this, the most common question I get is, how can we get the price down?

Top Five Ways New Jersey Businesses Can Lower Their Medical Insurance Premiums

The first and easy answer is to shop around. This one is obvious, but make sure your broker quotes your insurance coverage with all of the major carriers. Insurance carriers will take a snapshot of your group about 60-90 days before your renewal, and base renewal rates on those demographics. If your census changes during that time period, you may find a much better deal by moving the coverage. As an example, a 64 year old employee turns 65 one month before the renewal and comes off the plan at renewal. Your current carrier won’t re-rate your group but another carrier may end up being 10% cheaper.
Network considerations – In NJ, most of the carriers sell a managed care network and some sort of PPO network or national network. Decide if you really need the national coverage and maybe consider the managed care(HMO network). In most cases the smaller network really isn’t small at all and you will have access to all the same doctors and hospitals as before. Savings can be anywhere from at least 4% to probably 20%. If you are eliminating out of network coverage, the savings are closer to the 20%. Keep in mind that emergencies are covered regardless of the network so that should not be a concern.
Deductibles and co-pays – This is usually one of first options for getting the cost down. Raise the deductible and raise the co-pays. Many times you can add a $1,000 deductible and have premium savings well over $1,000. A $2500 deductible may save you $3,000. The reason for this is that the insurance companies know that for every increase in deductible, there will be less claims.
Health Reimbursement Accounts – To piggyback on option 3, I think every small business should at least consider a health reimbursement acccount(HRA). Your business will purchase a very high deductible plan and than use the premium savings to reimburse employees for their services. Premium savings can be 50% or more and after reimbursing employees, your savings can still be up to 30% over your current rates. The HRA funds are tax deductible to the business and tax free to employees. *** Extra plan documents need to be created a third party administrator should be used.
Health Savings Accounts(HSA)- Along the same lines as the HRA, your business will purchase a high deductible, HSA plan, and see premium savings up to 50% in some cases. You have the option of funding each employees account and the employee may use the funds for anything they see fit. If it is for a qualified medical expense, like prescriptions, dental work etc… the money will come out tax free for the employee.

If you are a New Jersey small business and your insurance premiums have gone out of control, I guarantee you will see cost savings by using the techniques above. We have seen employers with 10 employees save over $30,000 with options 4 and 5.

Please contact me here for your New Jersey Small Business Health Insurance. Contact – NJ Health Insurance Quote

10 Advantages of Using Health Reimbursement Accounts for Small Business Owners

July 16, 2011 By Mike Sheeran

I am a huge proponent of using health reimbursement accounts(HRA’s) to lower the health insurance premiums. The concept has been around for a long time but they are recently becoming more mainstream, especially to small business owners, to help get health insurance and health care expenses under control.

***If you are unsure what an HRA is, please check out this post. Consumer Directed Healthcare 101: Health Reimbursement Accounts – HRA

If you are still unsure of whether an HRA is right for your business, consider these advantages:

***These are all assuming you have a properly set up health reimbursement arrangement per the tax code and law.

You can choose exactly what health care expenses you will be reimbursing for. You can pay towards dental care, prescriptions only, hospital deductible only, glasses, etc….You, the employer, decides what will be paid for and how much.
Contributions are tax deductible to the business
Reimbursements to employees are received tax free
Unused money can be rolled over year to year for employees
Or – you don’t have to roll it over year to year – If you don’t want to
When employees, leave, you retain the unused funds, unlike a health savings account
You don’t have to pre-fund an actual account – you just pledge that you will reimburse for medical expenses and then pay as the claims come in.
You set the limit on how much to reimburse each employee, so you know your maximum expense per year.
Since all of the money pledged will likely not be used, you may be able to fund a higher amount than with an HSA.
Employees don’t actually have to be covered by the health plan to participate in HRA

Ultimately, the great thing about using the health reimbursement arrangement is flexibility. It is the perfect way to enhance your plan and reimburse employees for chosen health related expenses. Most importantly, your savings can be up to 20-30% over a traditional health insurance program since you are only paying for claims as they are incurred and not giving all of your money to the insurance carrier up front.

If you would like more information on HRA’s or any of your health insurance needs, please contact me here.

Consumer Directed Healthcare 101: Health Reimbursement Accounts – HRA

July 7, 2011 By Mike Sheeran

Health Reimbursement Accounts are another tool that most businesses can use to save up to 20-30% on their health insurance expenses.

In most cases, the HRA will involve two parts, a high deductible health plan and an employer owned and funded reimbursement account. Instead of purchasing a “premium” health insurance plan each year, the employer will purchase a more affordable high deductible plan and use the savings to reimburse employees for certain medical related expenses.

Premiums Savings

Depending on the current plan design, and the new offering, the premium savings can be up to 50%. (Greatest savings are seen when moving from a 100% plan to high deductible plan such as an HSA Qualified insurance plan)

Reimbursement

Employers can set reimbursement levels at their discretion as long as it does not discriminate between employees. A common technique is for the employer to fund the hospital deductible for single employees and families.

Any unused monies that has been set aside by the employer are retained by the employer year to year.

Employees are either reimbursed by submitting claim forms, or they are issued a debit card that allows direct payment from the employer HRA fund.

Taxes

When properly set up, the HRA monies are tax deductible to the business and are received tax free to employees. There are a few key issues that must be addressed though. Because of this, I recommend using a third party administrator to assist.

The HRA is considered a health plan so proper plan documents must be in place and signed off on by key company personnel.
All reimbursements must be substantiated by receipts to show that they are approved health expenses. The expenses must also be listed in Section 213(d) of the IRS Code
The person administering the plan may not have hiring or firing rights at your company. In addition there needs to be a backup administrator in case the main administrator is out for any reason.
There are more issues that need to be addressed but you get the picture. —- get a proper administrator. I have several that are very good to work with.

HRA In Action – Based on a Real Case

Employer Side

Small business with 10 employees facing another 25% increase. The new annual premium was going to be $110,000. On the current plan, the employees had a $1,000 single deductible for hospital inpatient and families had a $2,000 deductible

In this company, the employer felt that most of the employees rarely used the coverage so that most of the premium was being wasted unnecessarily. I agreed and suggested a high deductible health plan coupled with a HRA. This way, the employer would only pay for claims as they are incurred and money wouldn’t be wasted on people that never used the insurance plan.

The new plan we chose had an upfront deductible of $2500 per single and $5,000 per family. The new annual premium for all employees is now $50,000.

Premium Savings = $60,000

With the premium savings of $60,000, the employer has agreed to fund everyone’s full deductible. Based on their census of employees, the employer could potentially pay out $50,000 if everyone uses 100% of the money they have been allotted. With that in mind, he will have a guaranteed savings of at least $10,000 and likely much more depending on claims.

At the end of the year, the employer will retain any unused money and can even roll it over if he chooses to. That way employees who have not used the plan, can increase their HRA balance for coming years.

Employee Side

Each employee has been given a debit card provided by the third party administrator to pay for medical expenses covered by the plan. When they visit their doctor, they present their insurance card and pay their bill with the debit card. The money will come from the employer’s account and the employee’s net cost is now $0.

The employee will continue on like this until he has spent all of the money that the employer has allotted. Employees will then pay for their claims out of their own pocket.

My Opinion

The HRA set-up should be considered by all employers and I welcome the opportunity to present it. The HRA has a few more requirements and some educational issues that need to be worked through but in the end, both employers and employees win. In my opinion, it is probably the best way to make small business health insurance more affordable for everyone.