As a small business owner, you’re likely always on the lookout for ways to improve your employee health benefits without breaking the bank. Two popular options to consider are Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSA). That their acronyms have just one letter difference is the reason these two health benefits are often confused. But their differences are greater than their similarities. Let's explore the pros and cons of each and help you decide which one is best for your small business or startup.
First some acronyms and definitions…
What is an HRA?
An HRA is a benefit plan that allows employers to contribute funds to their employees’ healthcare expenses, such as deductibles, copays, and premiums, using pre-tax dollars. The employer determines how much money to allocate to each employee, and any unused funds at the end of the year will revert back to the company.
Warning: We're about to introduce yet another acronym.
An ICHRA (AKA Individual Coverage Health Reimbursement Arrangement) is a type of HRA. As of 2020, businesses of all sizes can use ICHRA to reimburse employees for their health insurance costs such as premiums and do so tax-free. This is a big deal for small businesses who, up until then, were left with two options — a complicated, expensive fully insured group health plan or nothing at all.
This newish type of group health plan gives the employer the ability to control costs while still offering a valuable benefit to retain team members and recruit new ones. For the employees, an ICHRA allows for greater personalization and choice, as it enables them to choose an insurance plan from the marketplace that best fits their needs and circumstances (versus the traditional one-size-fits-all group plan that have been the only option for SMBs for decades.)
StretchDollar's ICHRA plans are designed to best fit smaller-sized small businesses by simplifying them with defined categories like Full Time and Part Time so that small business owners can design a health benefit plan that works for their team and quickly, without stretching their budget.
What is an HSA?
An HSA is a personal savings account that allows individuals to set aside pre-tax dollars to pay for eligible medical expenses. Unlike an HRA, employees are typically responsible for setting up and managing their own HSA. The funds in an HSA can be invested and rolled over from year to year, and the account is owned by the employee even if they change jobs. There are some eligibility requirements to qualify for an HSA, such as being enrolled in a high-deductible health plan.
Pros and Cons of HRAs
An HRA key advantage is that employers have control over the funds because they decide exactly how much pre-tax dollars allocate to each employee each month. If an employer can afford just $200, that's exactly the amount of the benefit. A traditional group health plan typically requires that the employer pays for more than 50% of the total cost of the plan. When the average family health plan costs $22,000, covering more than half might be more than the budget can bear.
HRAs also are more flexible than HSAs because there are no access restrictions. (HSAs are typically an add-on for high deductible plans.) Another key difference is that HRAs are funded solely by the employer (like a pre-tax "gift" to the employee) and any unused funds at the end of the year revert to the company.
Pros and Cons of HSAs
An HSA is owned by the employee, which means the employee has more control over how the funds are invested and used. Typically, it's also funded by the employee and used as an investment vehicle, since the HSA benefit follows the employee even if they leave the company.
While HSAs can grow tax-free, there are some limitations such as contribution caps and eligibility requirements. Another con — some employees may find managing their HSA cumbersome keeping track of receipts, contributions and what's qualified and what's not.
Which One Is Best for Your Small Business?
Choosing between an HSA and an HRA can be much like choosing your favorite popcorn. Just as there are different types of popcorn, each with its own unique flavor, HSA and HRA also offer different pre-tax benefits that appeal to different small businesses. Okay -- the popcorn analogy might be a bit of a stretch but let's follow this one through.
Here are two scenarios to consider when weighing Salty or Sweet:
An HSA is best if you like your current group health insurance (and it's a high-deductible health plan)
A Health Savings Account (HSA) is an excellent addition for small businesses that already have a group plan and are satisfied with it. HSAs offer several benefits that can complement the existing healthcare plan, assuming it's a high deductible one. The pre-tax contributions can help cover deductibles, copayments, and other out-of-pocket expenses not covered by their insurance plan. And, well, this is the reason they were invented in the first place — to help with extra costs incurred.
An HRA is best if you don't offer health benefits or dislike your group plan (because it's expensive or restrictive)
For employers who don't offer health benefits or are frustrated with the rising costs, a Health Reimbursement Arrangement may be the better fit, especially an ICHRA. This plan option allows employers to provide their employees with tax-free money to purchase their own health plan from the health insurance marketplace. This solution can bypass the complexities of shopping for group health insurance and give employees the flexibility to choose a plan that best fits their needs.
Bottomline
HRAs and HSAs are valuable pre-tax options for small business owners who want to offer competitive employee benefits to retain their awesome team and recruit new ones. By understanding the differences between the two, you can make an informed decision that works best for your business and your employees.
Still curious about StretchDollar's pre-tax fixed benefit? Learn more about How it Works or get started here.
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