Employers take heed: 2023 is projected to bring a hefty 6.5% rise in healthcare costs, according to Aon (NYSE: AON), more than doubling the 3% experienced from in the year prior 2021-2022.

Aon's Health Value Initiative Database shows that clients' budgeted healthcare costs per employee stood at $13,020 in 2022, and costs are projected to rise to more than $13,800 per employee in 2023. This data was captured from nearly 700 U.S. employers representing 5.6 million employees. 

So can employers find innovative ways to trim these expenses? This is where a Liferaft Health Reimbursement Arrangement (HRA) can help save your business money on health insurance.

A Health Reimbursement Arrangement (HRA) is a health spending account that an employer can set up to reimburse employees tax-free for out-of-pocket healthcare expenses.

HRAs provide the ultimate flexibility and affordability regarding employee health coverage. You can tailor plans specifically for your employees' needs, providing coverage for premiums and co-pays all the way down to dental and vision expenses—and the funds in the account are not subject to taxes. Plus, HRAs are significantly easier for employers to manage than traditional group health insurance plans.

Below is an example of how Liferaft helped a client based in Minnesota, saving them $144,000 yearly on the company’s health insurance expenses. See the full case study here.

There are different requirements for incorporating an HRA depending on the type of health reimbursement account you are setting up. For qualified small employers HRAs (QSEHRAs), your business must have less than 50 full-time employees. For all types of HRAs, the account must be funded entirely by the employer, not through salary deductions, and the accounts can only reimburse employees for qualified and substantiated medical expenses.

The advantages of HRAs over traditional group insurance are clear: 

• Employees get to choose their individualized insurance plans and can be reimbursed for out-of-pocket healthcare expenses. 
• Since there is no pre-funding required, employers can save on upfront costs.
• Fixed dollar amounts mean that annual premium hikes are a thing of the past.
• There are no participation requirements, so even if employees don't use the benefit, it won't impact the HRA plan.
• Employees get tax-free reimbursements, and employers can deduct the reimbursements from taxes, so everybody benefits from tax breaks.
• Employers have complete financial control over their benefits. Employers decide how much and how frequently to reimburse employees' expenses with broad discretion in deciding who is covered under their plan.

The administration of an HRA account can take less than 5 minutes a month, allowing the employer to focus on real HR issues.

You can review our comprehensive guide to HRAs here.

Are Health Reimbursement Arrangements considered income?

According to the IRS, employer-issued reimbursements are not considered income and are exempt from federal income and payroll taxes. This is one of the significant tax benefits of distributing employee benefits through a Liferaft Health Reimbursement Arrangement.

What happened to unused funds? Do they roll over?

One of the central values of a Liferaft Health Reimbursement Arrangement is flexibility, and the answer here depends on the employer’s specific policies. Some companies may have a "use it or lose it" policy regarding account funds, meaning that any funds not used by December 31st will be forfeited and cannot be carried over into the new year. Other employers allow employees to roll over a certain amount of money from one year to the next. Put plainly—it’s up to you!

What are some disadvantages of an HRA?

Because the funds in a Liferaft Health Reimbursement Arrangement are employer-funded, the employer owns the money in the account even though it is for the individual to use. If the person leaves the company or their job is terminated, the account funds stay behind with their former employer.  Employers can offer a retirement account that allows former employees to utilize funds after leaving the company.

Additionally, different employers often have different rules for reimbursement, which can be a problem for employees if they switch companies. Aside from mandatory requirements like COBRA continuation, ERISA and HIPAA, plans can vary widely.

Which employees are eligible for a Liferaft Health Reimbursement Arrangement?

Liferaft Health Reimbursement Arrangements can be offered to any employee, as long as each job class is treated equally. This means you can easily provide benefits to part-time and seasonal employees. However, depending on what type of expenses you plan on reimbursing, there are specific IRS requirements. After learning about your business and goals, Liferaft will make a plan recommendation for the most tax-advantaged, affordable way to structure your account.

Our team knows the ins and outs of the health insurance marketplace and will guide you towards the solution that make the most sense for your business and your team. Come with questions! Our experts are happy to dig into the details to get you the clarity you need.

During the call, Liferaft will run a cost-benefit analysis on your company's current healthcare spending and show you different ways you can save—without sacrificing plan quality. After your consult, Liferaft will design a unique plan for your employee's health insurance, including suggested plans and accounts, plan policy documents, and the annual budget.