23 Sep The Advantages and Disadvantages of HRAs

Health Reimbursement Arrangements (HRAs) are becoming a popular option for some small businesses as they can help them provide health benefit flexibility and business cost savings.  However, HRAs can increase administrative complexity and time, overriding the initial reason the business chose a PEO. Here is a list of the advantages and disadvantages of choosing an HRA.

HRA:  The Advantages:

1. Cost Control: HRAs allow employers to set fixed contributions towards employees’ healthcare costs, which helps in budgeting and controlling expenses. Unlike traditional health insurance plans, where premiums can fluctuate, HRAs provide a predictable cost to the employer.
2. Flexibility: Employers can customize their HRA offerings to suit their business needs and the needs of their employees. This includes deciding what expenses are eligible for reimbursement and how much funding to provide.
3. Tax Advantages: Contributions made by employers to an HRA are tax-deductible for the business and tax-free for employees when used for qualified medical expenses. This makes HRAs an efficient tax-saving tool.
4. Employee Satisfaction: HRAs can be more attractive to employees as they often provide the freedom to choose how to spend their healthcare dollars. This can include expenses like premiums, deductibles, and other medical costs not typically covered by insurance.
5. Competitive Edge in Hiring: For small businesses that may not be able to afford comprehensive group health plans, offering an HRA can help attract and retain talented employees who value flexible and beneficial healthcare options.
6. Regulatory Support: Changes in regulations, like the introduction of Individual Coverage HRAs (ICHRAs) and Qualified Small Employer HRAs (QSEHRAs), have made it easier and more beneficial for small businesses to offer HRAs to their employees.

HRA:  The Disadvantages:

1. Complexity and Administrative Burden: Managing an HRA can be complex, especially for small businesses without a dedicated HR department. Compliance with regulations, handling reimbursements, and keeping records can be time-consuming and require specialized knowledge or additional administrative support.

1. Limited Scope: HRAs are limited to reimbursing employees for health care expenses, including insurance premiums. This might not be as attractive to employees as a more comprehensive health insurance plan that provide direct coverage.
2. Variable Costs: Although HRAs can help control costs by setting fixed contribution amounts, the actual healthcare expenses might be unpredictable. This can make budgeting difficult, especially if employees’ health care needs vary significantly.
3. Tax Implications: While reimbursements are generally tax-free for employees, improper management of an HRA can lead to issues with tax compliance. Ensuring that the plan complies with IRS rules to maintain tax-advantaged status can be tricky.
4. Employee Satisfaction and Recruitment: HRAs may not be as appealing to potential and current employees as traditional group health insurance plans, which can offer more predictable and comprehensive coverage. This might make it harder to attract and retain talent.
5. Risk of Underutilization: Employees might underutilize their HRA benefits if they find the process of paying upfront for care and waiting for reimbursement too cumbersome or if they are unaware of eligible expenses.
6. Regulatory Compliance: HRAs must comply with various regulations, including the Affordable Care Act (ACA) and other health insurance laws. Staying abreast of legal requirements and ensuring compliance can be challenging for small businesses.

These factors make it important for small businesses to carefully consider whether an HRA is the right choice for their health benefits strategy and to evaluate the needs and preferences of their employees.