What is a Group Coverage HRA?

A Group Coverage HRA is a type of Section 105 Medical Reimbursement Plan that has tax advantages and is owned and funded by the employer. HRAs can help employees pay for qualified medical expenses, and are compatible with all types of health insurance plans, from traditional copay-style plans to High-Deductible Health Plans. For employees, HRA reimbursements are 100% tax free and are excluded from an employee’s gross income. In addition, the reimbursements are also tax-deductible for the employer and FICA/FUTA payroll taxes do not apply to any HRA reimbursements.

How a Group Coverage HRA Works

Group Coverage HRAs are also commonly known as Integrated HRAs. The company sponsors a group health plan for its employees and also agrees to reimburse plan participants for certain out-of-pocket expenses (for example, a portion of the deductible). The employer sets the parameters for the reimbursements, and there are no minimum or maximum limits. Only the employer can fund the HRA, and the money is available to employees at the beginning of the plan year. Unused dollars remain with the employer, who can also choose to roll over leftover funds each year.

Employers will often consider this type of HRA along with an increase in their health plan deductible to reduce their monthly health insurance premiums. This often creates savings that will fund the HRA reimbursements requests by employees, with money left over. Since the employees get reimbursed for claims over the threshold amount, their net deductible/out-of-pocket amounts can remain the same. An Explanation of Benefits (EOB) is typically required with each reimbursement request, which is why we highly recommend that a TPA administer the HRA reimbursements to employees.

Case Study

A small consulting firm that was a long time Fall River client experienced outstanding results using an HRA.

• The employer originally offered a fully insured plan with a $2,000 individual deductible.

• The employer in the first year of their HRA strategy instead purchased a fully insured $3,000 deductible plan, but agreed to reimburse employees any amounts over the first $2,000 in deductible ($1,000 total reimbursement potential).

• The result is that employees still had the same net deductible of $2,000 after the HRA reimbursement was received. 

• While the premium savings were significant from raising the deductible, we had to subtract the actuarial expectation of any reimbursements the client would need to pay out. Fall River conservatively estimated that the plan would save 11% on its healthcare costs after paying the reimbursements and administrative fees, even though the employees had the same net deductible.

• After the year was over, it turns out that they saved even more than our estimate – approximately 20% from their original renewal.

• They continued to expand on their HRA strategy by raising their deductible and reimbursements over the coming years with great success. The employer was able to go five years without any change to the employees’ net deductible, while still keeping costs under the level they were at in their final year prior to having an HRA.

• Their positive experience with HRA’s convinced them to eventually make the leap to partial self-funding, which they still use and benefit from to this day.

Implementation Details to Keep in Mind

A Group Coverage HRA can also be paired with a healthcare Flexible Spending Account (FSA). Qualified expenses would be automatically paid from the FSA first, up to the available balance. Then, funds from the HRA are used for any qualifying medical expenses. Employees can also use an HRA to reimburse themselves for many common health care expenses, such as dental, vision, acupuncture and chiropractic expenses. A Group Coverage HRA is also a COBRA-eligible benefit, which means it must be offered to COBRA participants. There can be an upcharge for the HRA in the COBRA rates, and these should be determined at the beginning of each plan year by an actuary. If your broker doesn’t have an actuary on staff the way Fall River does, you may wish to retain an independent actuary when using HRAs.

Certain owners of the company have limited tax advantages with HRAs. Sole Proprietors, Partners, or S-Corp shareholders owning more than 2% of the company cannot receive tax-free reimbursements from the HRA. C-Corp owners may participate (https://www.peoplekeep.com/blog/tax-deductible-features-of-hras) in the HRA and receive tax-free reimbursements.

HRAs as a Cost Containment Strategy

Fall River will often recommend this approach for employers looking to dip their toes into a partially self-funded arrangement, while only taking on a small portion of the risk in the claims utilization. This strategy often seems less risky than other self-funded arrangements because the employer doesn’t spend the HRA funds unless employees have claims over the threshold. Also, the maximum reimbursement exposure is quite limited, typically between $1,000 and $5,000, far less than the $20,000 an employer can be subject to under a partially self-funded plan.

An HRA can be a great strategy if an employer has a few high utilizers on their medical plan, but everyone else is generally healthy. They may likely only need to reimburse a few employees that reach the deductible threshold, all the while enjoying the lower monthly premium savings of the higher-deductible plan.

When you’re analyzing the viability of a Group Coverage HRA for your company, it’s important to model out the projected HRA claims when evaluating costs, and so you know what to charge for COBRA. Your Fall River Client Manager can help with this, and also help you determine whether an HRA is a good strategy for your company. Contact us today!