Chances are, if you ask a small business owner what a health reimbursement arrangement or HRA is, they'll look at you funny.
HRAs have been around for a couple of decades as a way for employers to help their employees cover their healthcare costs. But they never really caught on — until now.
Size matters when it comes to health insurance costs. You need a large pool of employees for a self-funded plan to make sense (often the less expensive option.) Or, a minimum number of enrolled employees to make a fully-insured plan even within reach (the most expensive option but often the only one available for small businesses.) The process is frustrating and time-consuming. You didn’t get into the business of benefits management and never imagined it would be this expensive or complicated to take care of your employees.
This is where the HRA has emerged as an affordable and simple way to offer health benefits. And there are four key factors why they are more attractive today than ever before, especially for small employers.
What is an HRA?
Before we dive in, let's take a step back for a minute for a quick definition of HRA. The full name is a mouthful — health reimbursement arrangement. The concept works like this:
- Employers give a monthly pre-tax allowance to their employees.
- Employees then use that money to help pay for healthcare expenses, such as premiums.
Until recently, HRAs were limited by both the amount an employer could give and the types of companies that could participate. This changed in 2019 when the government expanded the use of HRAs by launching a new type (and yet another acronym) — an ICHRA. (We pulled together this nifty ICHRA guide, too.)
ICHRA, pronounced “ick-rah,” stands for individual coverage health reimbursement arrangement. (We can’t even make up these names.) This new HRA allows employers of any size to give their employees any amount of tax-free funds to purchase individual health insurance coverage, offering several advantages:
- More affordability: Employers choose how much to contribute without an upper limit (earlier HRAs had low thresholds on what an employer could put into them)
- More flexibility: Employees choose the plan they want
- Fewer constraints: There is no minimum number of employees that need to enroll
- Fewer headaches: Owners are no long the “benefits manager,” a weird and risky hat to wear
Why is the government involved?
Income is taxable, and the IRS wants that money, unless the government has permitted a pre-tax allotment. In the case of HRAs, the government wants to encourage more people to have access to healthcare, so the pre-tax HRA benefits have been expanded into what we call an alphabet soup of HRAs: QSEHRA, GCHRA, HRA, EBHRA, and now ICHRA.
The tax advantage helps to level the playing field for small businesses that don’t have access to the same cost-effective plans that large businesses do. (Check out the IRS.gov website for more stimulating descriptions of HRAs or read our Not-So-Boring Guide to ICHRA.)
The ghastly nomenclature is not the main reason it took years before HRAs caught on, though it certainly didn’t help. Important market changes are pushing all employers, especially very small ones, to search for more cost-effective health benefits.
4 Reasons small businesses are rapidly turning to HRAs
Reason #1: Health insurance has never been more expensive
Over the last two decades, the price of group health insurance has increased by 400%. What once cost a family of four $5,800 today costs $22,400. Sheesh.
The cost of providing traditional group health insurance has climbed so high that it’s becoming unfeasible for small businesses to take on the expense. Is it any surprise that 61% of small businesses with under ten employees don’t offer group health insurance?
HRAs offer a budget-friendly alternative while still providing a valuable benefit to their employees.
Reason #2: Individual health insurance is more often the better deal
Group health insurance is less expensive than individual health insurance, right? Not necessarily.
Today, there are at least 20 states where individual health insurance costs less than a similar group health plan…such as Georgia and the entire Atlanta region! There are another ten states where the difference is negligible. Add to the cost of group coverage the stress of inconsistent pricing — with group plans announcing rate hikes between 1% to 15% each year. Well, it’s enough to make a small business owner’s head spin or the operating budget explode.
A little secret about the individual marketplace: prices are generally contained. So those rate hikes typically seen in the small group space aren’t a factor.
Reason #3: The gov’t expanded the use of HRAs
HRAs wouldn’t be catching on if it wasn’t for the 2019 rule that established the ICHRA. Under an ICHRA, any size employer can contribute any pre-tax amount to an HRA for their employees, creating a more streamlined and cost-effective way to offer healthcare benefits that won’t break the bank.
Note: Some rules apply for distributing the pre-tax benefit, which you can read about here.
Reason #4: Remote work is a new norm
The pandemic changed how America works. Remote work is widely accepted, and businesses are hiring employees that live anywhere. But healthcare is local, and this shift makes traditional group health insurance, well, impractical. The medical groups and hospitals in Atlanta, Georgia, for example, are entirely different than in Austin, Texas. And that matters when choosing a health plan you intend your employees to like (or at least not to hate.)
To make matters more difficult for small businesses, those with ten or fewer employees often have a single health plan choice that is intended to be relevant to all workers – even if they live in different states. Finding a “one size fits all” health plan usually increases two things: the cost of the group health plan and employees’ dislike of their coverage. That’s a lose-lose equation for small businesses.
A better benefit with StretchDollar
Healthcare coverage is the gold standard benefit for recruiting and retaining employees and dates back to World War II. Sadly, the model hasn’t changed much since then, although nearly everything else has: from health insurance costs to the workforce environment to options available on the individual health insurance market.
StretchDollar has tailored its HRA to cater to the needs of small businesses. It features straightforward categories suitable for almost any employer requirement, allowing you to select a uniform allowance for all staff or to adjust the amount based on factors such as age, full-time or part-time status, or individual versus family.
With StretchDollar, small employers can have better control over their benefits budget, and employees can choose a health plan that fits their needs. It's a win-win for everyone.
Ready to get started? Jump in here and get access to health benefits in a snap.