Since 1989, Pacific Coast Planning has successfully installed employee benefit programs for hundreds of companies just like yours. Our dedication to service and knowledge of the marketplace is reflected in the fact that, since our inception, we have retained 95% of our customers. We have developed strategic alliances in several key areas to provide additional services important to business owners.
With insurance premiums continuing to experience tremendous increases each year, small business owners are facing tough decisions regarding their health care options. Many employers are desperately seeking ways to lower health care costs for the business while maintaining affordable health care for their employees.
To contain the costs of health insurance premiums, many small business owners have switched to high deductible health plans (HDHP). HDHPs generally result in lower insurance premiums with incrementally smaller year-over-year premium increases. However, HDHPs can put additional financial strain upon employees. In order to help employees cope with the deductible increases and out-of-pocket expenses, employers are coupling HDHPs with either a Health Savings Account (HSA) or a Health Reimbursement Arrangement (HRA).
While both plans carry tremendous advantages for both employers and employees, each plan is structured much differently from the other. These differences can have profound consequences for the employers who offer them. Therefore, it is extremely important that small business owners are fully knowledgeable about how each plan works before offering one for their business.
Health Savings Accounts
An HSA is a tax-favored savings account that can be used by employees to pay for qualified medical expenses. An HSA can only be offered with a qualifying HDHP. The Department of the Treasury states that a qualifying plan must have a minimum deductible of $1,200 for individuals and $2,400 for a family in 2010. Additionally, the HSA must be attached to a tax-favored trust or some type of custodial account with a bank or financial institution. Only when these requirements have been met, can an employer establish an HSA for his/her employees.
Once an HSA has been established, it is funded by either by the employer, the employees or both. Annual contribution limits for an HSA are capped at $3,050 for individuals and $6,150 for families in 2010. Contributions are tax deductible to both the employer and the employee, depending on who is making the contribution. Plan participants who are age 55 and older are also allowed to make "catch up" contributions. The current 2010 limit for a "catch up" contribution is $1,000 on top of the annual limit.
Health Reimbursement Arrangements
HRAs were derived from Section 105 of the IRS tax code that was written in 1954 following WWII in an attempt by the government to encourage small businesses to provide benefits to their employees. An HRA is a specified dollar amount that an employer pledges to his/her employees for the reimbursement of qualified medical expenses and insurance premiums. To set up an HRA, many employers look to a third-party to take care of all of the paperwork required by Internal Revenue Service, Department of Labor, and the Employee Retirement Income Security Act. While there are eligibility requirements that must be met prior to an employee being eligible for an HRA, these requirements are not as restrictive as the deductible requirements of an HSA.
Because the plan is employer-funded, the employer has greater leeway in defining how the HRA funds will be utilized. For instance, employers are able to establish annual expense limits with carry forward and carry over amounts. The employer can alter these amounts each year when re-electing their benefits for the plan. Employers can also take advantage of tax savings by deducting up to 100% of qualified medical expenses and insurance premiums that are reimbursed.
How are the plans different?
Perhaps the biggest difference between the two plan types is ownership. HSAs are owned solely by the employees who participate in them, while the employer owns the HRA. With HSAs, employees can withdraw funds to pay for both qualified and non-qualified expenses. However, withdrawals for non-qualified expenses will result in a 10% excise tax penalty. (Increasing to 20% in 2011). This scenario is especially troublesome for employers contributing to an HSA. Their funding is being spent on something entirely different than what it was intended for. With an HRA, employers do not reimburse until after a qualifying medical expense has been incurred. For small businesses that experience high employee turnover, an HSA could come at a very high cost.
While both plans provide small business owners with cost containment solutions for the increases in health care, the requirements levied on an HSA may prove too restrictive to accommodate some employers. With an HSA, employers are forced to utilize HDHPs due to the minimum deductible requirements established by the government. Because an HRA is not subject to the same requirements, employers are able to offer it with a greater variety of insurance plans that may already be in place. For instance, if an employer is satisfied with how their current group health insurance plan is structured, they might not be able to offer an HSA without first changing their deductible limits. However, the exact same employer could offer an HRA without restructuring their group health thus saving them time and energy. Even employers who don't currently offer group health insurance can utilize an HRA to help employees pay for out-of-pocket medical expenses.
Look Before You Leap
While an HSA coupled with an HDHP offers employers many advantages over traditional forms of health care, an HRA gives employers increased flexibility and control to ensure that their contributions are utilized the way they were intended to be. If your business has a high employee turnover rate, your business model would be far less threatened by switching to an HDHP coupled with an HRA rather than an HSA.
With today's health care market experiencing rapid change, it is extremely important that small business owners take the time to properly educate themselves about their health care options. Policy regulations are in constant change and information should be reevaluated on an annual basis. Both HSAs and HRAs have clear advantages that can bring the costs of health care to affordable levels for many employers. However, it is important to scrutinize the details of each plan before making a decision that will impact a small business owner for many years to come.
For more information on HRA's and HSA's and how they work with High Deductible Health Plans (HDHP), contact David R. Parr.
Your income is typically your largest asset. Think about how much you earn in a year and what that would be over a lifetime. The financial consequences of a lengthy disability could literally cost you millions. A 25-year-old worker who makes $50,000 a year and suffers a permanent disability could lose $3.8 million in future earnings. You don't hesitate to insure your home, car and other valuable possessions, so why wouldn't you insure something that is much more valuable than all those things?
If you're still not convinced that your income is worth insuring, think about how long you'd last without your paycheck before it would be difficult to pay for everyday expenses. The LIFE Foundation conducted a study that found that 70 percent of working Americans couldn't make it one month before financial difficulties would set in. More than one in four Americans wouldn't make it a week. In the event of a disabling illness or injury—and the odds are much greater than you might realize—disability insurance provides you and your family with a source of replacement income to help make ends meet until you're able to return to work.
Explore this section to learn more about disability coverage, including the different sources of disability income protection and ways to get coverage. The Disability Insurance Needs Calculator can help you determine how much coverage you need.