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Consumer-Directed Health Plans (HSA + HRA)

Most employers have not properly evaluated a high deductible health plan (such as an HSA eligible plan) in comparison to their traditional health plan. This is because most employers haven’t been given a proper explanation of plan benefits, most brokers do not propose the plans to employers, and a majority of brokers as well as employers do not evaluate the plan in combination with a health reimbursement arrangement (HRA).

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Video: HRA for Employers

What is a HSA Eligible Plan/CDHP?

An HSA eligible plan has at least a $1,250 annual in-network deductible for individuals ($2,500 for families), and has a maximum in-network annual deductible and out-of-pocket limit of $6,350 ($12,700 for families)1. There are a number of other factors which make a plan HSA eligible, such as the plan must offer certain preventative care benefits on a first-dollar basis outside of the deducible2.

Consumer-Directed Health Plans are the combination of a high deductible plan (typically an HSA eligible plan) with either a health savings account, or a HRA2. Employers generally choose the HRA option as funds are reimbursed as employees need them as opposed to placing the funds in an employee owned savings account.

The “big catch” is high deductible plans (outside of preventative care) require the participant to pay out of pocket towards their negotiated medical claims until they reach their deductible. While specific benefits differ from plan to plan, and carrier to carrier, many comparable HSA plans are available which offer similar benefits to traditional health plans after the initial deductible. As an example, a traditional plan may offer a $500 copay, per day for inpatient hospital services. The HSA equivalent may be deductible first, then a $500 copay, per day. A CDHP with a HRA helps the employee pay some, or all of the deductible.

 

Why Consider an HSA Eligible Plan/CDHP?

Introducing a deductible to a health plan can create significant premium savings. When premium savings approach, or exceed the introduced deductible amount, and benefits after the deductible are comparable to the traditional plan, you may find scenarios where annual expenses are always going to be less on the high deductible plan than the traditional plan.

Example: If a $2,000 deductible was introduced to a traditional plan to create an HSA eligible plan, with the same benefits after the deductible has been satisfied, and the annual premium savings was greater than $2,000, one could quickly argue that an individual will always find an annual savings.

 

Why the HRA?

The HRA allows the employer to offset the introduced deductible for the plan participants (either in full, or through a partial arrangement).

The combination of the two plans may be the solution to meet your health benefit goals. As HRA plans can be customized, and employers can adjust their health plan premium contribution amounts, scenarios may be found which increase overall employee benefits while reducing employer costs. Most employers will find participant utilization of the HRA will be less than 50%. Therefore in scenarios where the worst case cost for the employer (100% utilization) is equal to the traditional premium savings, every dollar not reimbursed for employee medical expenses is a direct employer savings.

Typically, after all expenses and premiums are paid, the HRA results in a net reduction of costs ranging from 15%-25%3.

Lastly, employers have the ability to offer the plan in conjunction with a wellness program. Specific guidelines must be met, but employers have the ability to incentivize employees to better their health (getting an annual physical, enrolling in a smoking cessation program, etc.). This may lead to healthier staff, and ultimately reduce claims.

 

What Are The Tax Implications of Reimbursements?

Generally employees receive reimbursements on a federally income-tax free basis, and employers make pre-FICA tax contributions to the HRA plan4. As self-employed persons are not eligible for an HRA, they should consider individual health savings account contributions (if properly structured, HSA contributions are made on a pre-FICA tax basis from the company, and are eligible for a personal income tax deduction; limits apply to the amount you can deduct, and should be coordinated with your tax professional)1.

 

Learn More

Employers can compare plans by using our proprietary Traditional Plan vs CDHP tool.

1 Publication 969 (2013), Health Savings Accounts and Other Tax-Favored Health Plans Internal Revenue Service http://www.irs.gov/publications/p969/ar02.html
2 “Consumer-Driven Decision: Weighing HSAs vs. HRAs,” Joanne Sammer and Stephen Miller, CEBS , Updated May 3, 2013, https://www.shrm.org/hrdisciplines/benefits/articles/pages/hsasvshras.aspx
3 “Health Reimbursement Arrangement” O.C.A. Benefit Services http://www.oca125.com/services/hra-admin/
4 “HRA FAQ” O.C.A. Benefit Services http://www.oca125.com/employee-faqs
Disclosure: Patrick M Kuster, makes no warranties or representations as to the accuracy and completeness of the information contained in this document, including any related articles, newsletters, or other publications. This material does not constitute tax or legal advice. Patrick Kuster does not render tax or legal advice. The information contained herein is provided for the convenience of the recipient without any warranty of any kind, express or implied, and is not intended to provide specific advice or recommendations for any individual or entity. The information contained herein should not be the sole source for legal disclosure decisions. Consult with your legal advisors before making any decisions.