Although they're more well-known, conventional methods of offering health benefits like group plans or pay increases fall short in many ways. HRAs, or health reimbursement arrangements, however, solve many of those common pain points. They represent the greater alternative to taxable stipend for medical health insurance. The difference is based on the tax savings that accompany the HRA. It makes sense to judge all your options with regards to pricey benefits and employee coverage, so let's have a look!
Some HRA history
In yesteryear, a large benefit of group plans was that they are deductible expenses for employers and were removed from employee paychecks on the pre-tax basis. More and more, these big group plans are merely unaffordable and cumbersome for small businesses to offer. Another disadvantage of group plans is forcing everyone to choose the same kind of plan, when individuals naturally have different needs and preferences.
Fast toward the implementation of the Twenty-first century Cures Act, a brand new tool allows small businesses to savor exactly the same tax benefits as big corporations, with increased customizable and flexible options for employees to choose what’s perfect for them.
HRAs: the greater alternative to taxable stipend for health insurance
Some employers provide a regular, fixed amount of money, or stipend, to their employees to assist cover the price of medical health insurance. While this choice is easy from a some time and administration perspective, the value of these dollars will be greatly diminished because they are considered taxable income. Furthermore, simply writing from the stipend as a business expense will have payroll in addition to income tax implications.
Health stipends aren't subject to compliance problems that group plans have, and they can be very simple to administer through payroll. However they aren't tax advantaged as an HRA. Not only are small businesses required to pay payroll tax around the reimbursements, employees must claim the stipend as income and there isn't exactly any responsibility for whether or not the money is even used for health insurance.
With an HRA, employers could make reimbursements without payroll taxes and employees don't have to recognize income tax. In addition, reimbursements produced by the company count like a tax break.
Reimburse employees by having an HRA
For companies that help employees with medical health insurance by providing a “health stipend” or by “adding to employee salaries”, HRAs will normally have a huge tax advantage.
Sometimes known as “401(K)-style” insurance, two recently created HRAs allow a company to reimburse for medical expenses and/or insurance premiums on a tax-free basis. Under this arrangement, employees purchase their insurance around the open market after which submit states their employer to obtain reimbursed for that price of their premium and if allowed, all qualified medical expenses.
- The qualified small employer HRA (QSEHRA) requires your business to become small, with less than 50 Full-time Equivalent employees, and also you can’t provide a group plan simultaneously. If you meet those qualifications, you can use an HRA administration tool (like ours!) to create your QSEHRA, choose how much you'll reimburse each month (as much as the contribution limits), let your employees pick the plan that actually works best for them, and reimburse them once they submit receipts!
- The individual coverage HRA (ICHRA) is nearly like a “super-charged” version of the QSEHRA. Rather than being limited to 50 employees, employers associated with a size can setup an ICHRA for his or her teams. There are also no contribution limits with this HRA. Another key differentiator from HRAs in the past? ICHRA allows business owners to customize their reimbursements across different classes of employees. While everyone must be treated fairly inside a certain class, reimbursement rates can vary between full-time, part-time, seasonal, remote, etc.
How HRAs work
The employer chooses an HRA for her company, sets a financial budget that actually works on their behalf, after which lets the employers know they can use it. From there, once an employee pays for a medical expense or premium, they just submit the receipt and submit for reimbursement.
For firms that help employees with health insurance by providing a health stipend or by adding to employee salaries, tax-free reimbursement will typically have a huge tax advantage for employer and employee. For instance, if a 10-person company offers employees $300/mo ($3,000/mo as a whole reimbursement) by increasing salaries versus tax-free through an HRA, $1,200 per month ends up likely to taxes every month.
Take Command might help!
Take Command makes establishing a small business HRA for the business easy. Our team will help you set your financial allowance, take care of the admin paperwork, and help your employees pick a plan that meets their needs. No need to be worried about finding the perfect plan which has the right doctor network or prescription coverage, ultimately leaving someone left out and disgruntled. Using the HRA, each employee picks an ideal arrange for them that matches affordable.
