HRA's are IRS approved plans that allow employers to pay employees tax free dollars towards approved health care expenses.  Established by the IRS under section 105 of the tax code in 1954, they are considered a defined contribution plan, versus a defined benefit plan (group health insurance).  To help you understand the distinction between defined benefit versus defined contribution, think pension versus 401K.

The use of HRA's as a viable replacement for group health insurance has not been widely recommended due to the nature of health insurance medical underwriting prior to PPACA (Patient Protection and Affordable Care Act) and healthcare reform.  Prior to healthcare reform all individual health insurance was medically underwritten, meaning that insurance carriers can rate, rider, exclude and deny coverage for pre-existing conditions, and adverse selection criteria such as height/weight, personal and family medical history.

With the advent of PPACA, national healthcare reform is scheduled to fully implement on 1/1/2014.  At that time, all health insurance will become guaranteed issue, and group health insurance will no longer be necessary as a means of guaranteed coverage.  Now, for many small businesses, the HRA will become the preferred method of delivering health care benefits to their employees because of the cost savings to the business, the potential cost savings to the employees, and perhaps most importantly, it's the only option that ensures employees have access to health insurance without compromising their dependent's eligibility for the premium tax credits available through the health care exchanges in 2014.

An HRA is not health insurance, it is simply a tax-deductible employer funding vehicle that provides an amount set by the employer to the employee tax free to spend on approved medical expenses, including health and long-term care insurance premiums.

For most employers who already offer group health insurance, managing the ever increasing costs while still trying to maintain a meaningful plan offering is a main concern.  Employers have no control of the escalating costs of health care, and little control of the related increases in insurance costs year to year.  Their only option up to now has been to reduce benefits, pass on the cost to their employees, or both.

Beginning in January of 2014, small businesses no longer need the group health insurance platform to guarantee coverage for themselves, their families, or their employees.  All health insurance will be guaranteed issue (GI) and available to anyone who wants it (and can afford it).  It's expected to increase in cost because of GI and the minimum essential benefits now required by law.  To help offset the costs to lower and middle income individuals, the federal government provides tax credit subsidies to people with incomes from 100% to 400% of the federal poverty level, but only if they purchase their insurance coverage through the healthcare exchanges/marketplaces.

So how does that translate to the benefits of an HRA?

• Cost savings of 25% - 50% over group health insurance.
• With an HRA the employer decides how much to contribute per employee, effectively controlling the escalating costs of group coverage by getting out of the health insurance business altogether, but still providing access to health benefits that are guaranteed issue through the federal, state, or private exchanges/marketplaces.
• No funds are disbursed until employees incur approved medical expenses.
• Employees can spend their allowance on approved medical expenses including:
  • Health insurance premiums
  • Health plan deductibles, co-payments, co-insurance
  • Dental and vision insurance
  • Other approved expenses (see list below)