The HRA changes can mean big things for Small Businesses. Why? The new HRA changes allow small businesses to fund employee premiums, using the individual health insurance market. Of the crazy things proposed to “repeal and replace” Obamacare, this one has the potential to be beneficial.
First, let’s start with what is an HRA (health reimbursement arrangement). An HRA is defined as
A Health Reimbursement Arrangement (HRA) is an employer-funded account that helps employees pay for qualified medical expenses not covered by their health plans. HRAs are compatible with all types of health insurance plans, and they are owned by the employer. – Bank of America
As an employer, we set aside a fixed amount of money to a worker's HRA each year for his or her to use. Unlike other health spending accounts, only an employer can put money into your HRA. The money is available at the beginning of the year. HRA benefits can be carried over if we wish to make that our policy
The new HRA changes allow you to fund employee premiums in the individual health insurance market. So, instead of the hassle of working with an insurance broker to find a group insurance plan, you can set aside a fixed amount for each employee. He or she would then have the flexibility to purchase the plan that works best for them.
First, the new rule is set to go into effect on January 2020. The rule will allow for expenses such as medical, dental, and vision premiums.
Historically, health insurance has been tied to large employers. Consequently, it was not designed to serve small businesses or independent contractors. As a result, small business were at a disadvantage when attracting talent. Ironically, this is where the bulk of Americans work. Thus, why we have the highest rate of uninsured people in the first world.
Even in large companies, management selected the plan. It was one-size-fits-all. If you left the employer, you could qualify for COBRA, but after six months, you were out of luck.
Now, instead of management choosing the plan, employees can. This shifts it from a defined benefit to a defined contribution. Whether this leads to better overall coverage remains to be seen. It’s not all smooth sailing, but on the whole, it’s likely to be beneficial.
The dirty little secret about group health plans is the high administrative costs. It costs the business time to review all the plans. The broker takes a cut, and the list goes on. The changes to the HRAs lessen these burdens and costs.
The old adage “You don’t get something for nothing” is alive and well. The HRA changes still leave small businesses on the hook administratively in three key areas.
First, you will need to read and comply with a set of documents in order to be eligible. Second, you will have to show compliance and verify that employees are maintaining coverage. Finally, you will be required to provide annual reporting. Technology will likely make this easier, but it won’t go away completely.
Employee health expenses were always deductible, but the administrative burden was a hassle. To avoid that hassle, roughly 10% of small businesses were bumping up salaries to avoid coverage. Those companies will benefit significantly from the HRA changes since they will no longer have to pay additional payroll taxes.
The wider scope of the HRAs allows for employers to cover seasonal and part-time employees. Even independent contractors are eligible. Importantly, the coverage is portable. So, if a Gig employee leaves, they don’t lose the plan.
One of the key hurdles for small businesses was the minimum enrollment requirements for group plans. This left small businesses ineligible because they lacked the minimum number of employees, or had to pay huge premiums because of their small size.
In summary, the key thing small businesses should know about the HRA changes is how this helps us to attract talent. In our post, “3 Ways to Attract the Best Talent More Often”, we mention how small businesses can use personalization to their advantage. The HRA changes help us do just that. Instead of losing talent because of health insurance coverage, we can compete more effectively.
Brian Cairns, CEO of Prostrategix Consulting. Over 25 years of business experience as a corporate executive, entrepreneur, and small business owner. For more information, please visit my LinkedIn profile