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.
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.
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.
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.