THE SMALL BUSINESS HRA

Transcription

1 a The comprehensive guide to THE SMALL BUSINESS HRA Everything you need to know to start offering reimbursement benefits

2 Our story Offering traditional group benefits sucks. Why? They re too expensive, too complex, and too one-size-fits-all. PeopleKeep is a new way to offer benefits called personalized benefits. Most people believe benefits are the services a company offers, such as a health insurance plan or 401k. With personalized benefits, it s the opposite. Companies give people tax-free money to spend on the consumer services they find most valuable. It s as simple as wages. For small businesses that think offering traditional group benefits sucks, PeopleKeep is personalized benefits automation software that makes offering benefits simple, painless, and personal for everyone. Today more than 3,000 companies use PeopleKeep to hire and keep their people across the United States. PeopleKeep is based in Salt Lake City, Utah. To learn more about PeopleKeep, visit www. peoplekeep.com. Ready to see how PeopleKeep can work for your company? Visit to preview our software or click below to have a Personalized Benefits Advisor contact you. contact sales

3 ii Introduction Whether you re looking to offer benefits for the first time, being forced to cancel your group policy due to cost, or you re interested in a simpler approach with more choice, your search is over. There is a new and better way for your company to provide employee health benefits. It s called a Small Business Health Reimbursement Arrangement (HRA), 1 and it represents an alternative to traditional group health insurance. A Small Business HRA allows employees to purchase their own individual health insurance policy independent of the company. The company then reimburses each employee tax-free for their individual There is a new and better way for your health insurance and medical expenses up company to provide employee health to a set monthly allowance. benefits. Although the concept of reimbursing employees for individual health insurance expenses has been around for many years, compliance concerns have made many small businesses hesitant to make the switch until now. Thanks to the new legislation, the number of U.S businesses offering health reimbursement plans is expected to more than double from 2017 to Small businesses have a lot to gain from the new approach. In addition to alleviating cost concerns, the Small Business HRA helps small businesses hire and keep quality employees. Most employees value good benefits above a higher salary, but as it stands, many small businesses can t afford to offer group health insurance. By dropping benefits altogether, however, they risk losing current and future employees. The Small Business HRA offers a solution. In this ebook, we ll explain why small businesses are adopting HRAs and what you need to know to do the same. ¹ For more information on the Sm all Business HRA, see ² Benefits Strategy and Benchmarking Survey, Arthur J. Gallagher and Co., 2014 and health reimbursement plan participation approximated by extending median yearover-year growth.

4 iii Table of contents Introduction ii The problem 1 Group health insurance costs are unsustainable 1 Cutting benefits has retention and culture costs 3 The solution 5 How a Small Business HRA works 7 What about a taxable raise? 9 Reasons Small Business HRAs are good for small businesses 12 An HRA provides value to your company 12 Individual health insurance provides value to your employees 14 Reimbursements to employees are tax-free 15 Will a Small Business HRA work for my company? 16 How to set up a Small Business HRA plan 17 Pick a start date 18 If you have a group policy, set a cancellation date 18 Confirm who will be eligible 19 Determine a budget and set allowances 19 Strategy 1: Ensure immediate company savings 21 Strategy 2: Give maximum budget to employees 21

5 iv Establish legal plan documents 21 Communicate your new benefit to employees 23 Help employees buy individual health insurance 25 How to manage a Small Business HRA 26 Update your plan concurrently with staff changes 26 Record reimbursements and store documentation 26 Evaluate allowance amounts annually 27 How to communicate a Small Business HRA to employees 28 Communicate early and often 28 Announce your new benefit 29 Provide a custom employee welcome letter 31 How to help employees purchase individual policies 32 Using your Small Business HRA to hire new employees 33 How to choose a Small Business HRA administration tool 35 Features to look for in a Small Business HRA administration tool 35 Automated compliance and software updates 35 Employee tools and resources 37 Business tools and resources 39 Questions to ask Small Business HRA providers 41 How long does it take to set up and generate plan documents? 41 Where will employees purchase individual health insurance? 41 How do employees submit reimbursement requests? How quickly are employee reimbursement requests reviewed? 41

6 v How are employees notified of the status of reimbursement requests? 41 Who can an employee talk to if they have issues with reimbursement requests? 42 How are reimbursements handled? Is prefunding required? 42 How can I find out about other businesses experience with your tool? 42 What are the fees associated with administering a Small Business HRA? 42 Conclusion 45

7 1 The problem The small business benefits challenge Today s challenging benefits landscape has led many small businesses to take one of two approaches: Continue offering expensive group health insurance, or offer nothing. Yet neither outcome represents a solution beneficial to the business or its employees. As a result, many small businesses feel they are faced with two equally unsatisfactory options $1,129 $1,071 $1,081 $999 $951 $921 $899 $779 $721 $3,983 $694 $627 $610 $558 $508 $466 $355 $334 $318 Worker contribution Employer contribution Figure 1. Cost to cover a single employee with group health insurance, Group health insurance costs are unsustainable Decades ago, group policies were the best way to provide quality health insurance to employees. Today, however, many businesses and employees find this traditional approach frustrating and costly. From 1999 to 2016, the annual cost of group health insurance for a family of four

8 2 has changed nearly 350 percent increasing from just under $6,000 in 1999 to more than $18,000 in It gets worse. We expect group health insurance costs to continue to skyrocket over the next 10 years. By 2025, we expect the annual average cost of group health insurance to reach nearly $25,000 per family and $8,500 per individual. 4 Single Family Actual Projected $5,884 / year $16,351 / year $6,025 / year $16,834 / year $6,250 / year $17,545 / year $6,435 / year $18,142 / year Figure 2. Projected cost of group health insurance $8,418/ year $24,783 / year Due to the increasing cost and complexity of group health insurance, few small businesses provide health insurance to employees today. As shown in Figure 3, less than half of very small businesses (3 9 employees) offer health insurance, compared to 98 percent of large businesses (200+ employees). 5 Business size employees 55% 46% employees 74% 61% employees 88% 80% employees 97% 91% All small and medium 65% 55% businesses (3 199 workers) All large businesses 99% 98% (200+ workers) All businesses 66% 56% Figure 3. Percentage of businesses offering health benefits, Since 1999, the percentage of Americans covered by group health insurance has steadily declined. Facing double-digit premium increases, many businesses have ³ 2016 Employer Health Benefits Survey, Kaiser Family Foundation, September 14, 2016, 35. ⁴ 2016 Employer Health Benefits Survey, Kaiser Family Foundation, September 14, 2016, projections approximated by extending median year-over-year growth. ⁵ 2016 Employer Health Benefits Survey, Kaiser Family Foundation, September 14, 2016, 45.

9 3 either cut health benefits or changed policies to include higher deductibles, larger copays, and more employee premium sharing. Cutting benefits has retention and culture costs Cutting health benefits entirely is one of the most drastic actions a small business can take. Yet in trying to escape the unsustainable costs of group health insurance, these businesses are actually creating new costs ones that may be even greater. Offering benefits is crucial to solving one of small businesses toughest challenges: hiring and keeping employees. By reducing or cutting health benefits, you re disappointing your current employees and putting off potential hires. More than three-quarters of job seekers say benefits are either very important or extremely important when considering a job offer, 6 and the same percentage say they prefer better benefits to a higher salary. By not offering benefits, many businesses unintentionally drive away potential and current employees. More than three-quarters of job seekers say benefits are either very important or extremely important when considering a job offer, and the same percentage say they prefer better benefits to a higher salary. That can be an expensive misstep. It costs a typical company the equivalent of 6 to 9 months in salary each time they have to replace a salaried employee 7 that s $20,000 to $30,000 for a $40,000 manager in hiring and training expenses, along with the potential lost revenue from customers. These costs far outweigh the expense of offering benefits to employees. ⁶ Paul Fronstin and Ruth Helman, Views on the Value of Voluntary Workplace Benefits: Findings from the 2015 Health and Voluntary Workplace Benefits Survey, Employee Benefit Research Institute, November ⁷ Christina Merhar, Employee Retention - The Real Cost of Losing an Employee, Zane Benefits blog, February 4, 2016.

10 4 Small businesses can t drop their health benefits solution if they want to hire and keep top talent, but group health insurance costs are unrealistic. Fortunately, there is a third option. Back to top

11 5 The solution The Small Business HRA Many small businesses have already taken action. Rising health insurance costs have created a paradigm shift in employee health benefits, from a company-provided, one-size-fits-all model to a company-funded employee choice model. Businesses aren t paying for a policy that covers all employees anymore. Instead, they re setting money aside to reimburse employees for policies employees choose themselves. While the transition from group to individual health insurance policies has been gradual since 2000, recent cost increases and public policy changes have accelerated this shift. In December 2016, Congress and the White House passed the Small Business Healthcare Relief Act 8 a provision in the 21st Century Cures Act. This important piece of legislation created a new class of health reimbursement plans: the Small Business HRA. With a Small Business HRA, businesses can reimburse employees for individual health insurance and medical expenses. By setting a monthly allowance instead of paying group premium expenses directly, businesses control their expenses and employees are free to shop for individual policies that best meet their medical and financial needs. Businesses receive the same tax advantages with a Small Business HRA as they do with group insurance reimbursements are treated as tax-free to the company and employees. What does this mean for you? If your company is among those that do not currently offer group health insurance due to costs, you can now establish health benefits at a price you control. Alternatively, if your company is currently offering group health insurance, you can cancel your existing group policy and direct the money you were spending to reimburse your employees for individual health insurance policies they choose and pay for themselves. By avoiding the financial and time costs associated with group health policies, ⁸ For more information on the SBHRA bill, see our ebook The Small Business Healthcare Relief Act.

12 6 you and your employees will be free to do what you all do best focus on your business. See how a Small Business HRA helped one company offer health benefits without breaking the bank. Scenario 1: 25-person medical supply company Problem: A medical supply company in Colorado wanted to start offering health benefits to hire and keep its top employees, but a group health insurance policy would exceed its budget. 1 The company needed health benefits that offered financial support to employees while remaining within budget. Solution: The company started an HRA to give all full-time employees, i.e., those working 30 or more hours per week, allowances to reimburse their individual health insurance and medical expenses. The company offered two monthly allowances: $200 for single employees with no dependents, and $500 for employees with families. Employment status Eligibility criteria Monthly allowances Self only Family Full-time W-2 employees 30+ hours a week $200 $500 HRA design for the medical supply company Results: By setting up a Small Business HRA, the company was able to fix its health benefits costs at $2,400 or $6,000 per employee per year. Group health insurance cost (monthly) $31,371 *coverage for 83% of premiums for 25 individuals HRA cost (monthly, 100% utilization) $12,500 Monthly savings $18,871 Annual savings $226,452 Savings % 60% Cost analysis for the medical supply company ⁹ Monthly group health insurance costs were calculated according to 2016 Employer Health Benefits Survey, Kaiser Family Foundation, September 14, 2016, 35.

13 7 A Small Business HRA also addresses the challenge of how to hire and keep talented employees. Employees value benefits that are tax-free, easy to understand, and easy to use. When you set allowances in your Small Business HRA, employees have a clear budget for health spending. All employees, regardless of health needs, can easily purchase an individual health insurance policy that makes the best sense for themselves and their families. Employees appreciate the ability to choose the doctor network they want. By offering an HRA, you re showing your employees that you understand and respect their need for flexibility and individual choice. Instead of being shoehorned into a group policy, with an HRA, employees are free to choose an individual policy that allows them to keep their doctors and covers their prescriptions and existing conditions. That s a key perk they may not get elsewhere, and it s one that could make a difference in whether your employee sticks with you or looks for another opportunity. How a Small Business HRA works Here s a basic overview of how your Small Business HRA will work. As shown in Figure 4, the idea is simple. With a Small Business HRA, your company offers employees a monthly allowance to reimburse health insurance and medical expenses. Employees choose and pay for their own health policies, and your company reimburses them up to the set allowance amount. With an HRA, all reimbursements are made on a tax-free basis. When you re giving employees tax-free money, your company must ensure compliance with tax and labor laws, including Step one IRS and Department of Labor The company sets Step two requirements. That means you an allowance Employees request must have certain policies and Step three reimbursement procedures in place, including A third party reviews Step four but not limited to legal plan documentation documents, a Summary Plan The company reimburses employees Description (SPD), notice requirements, and a system Figure 4. How a Small Business HRA works for reviewing and storing documentation.

14 8 If you re found out of compliance with certain laws or requirements, your company could incur fines of up to $100 per day per employee. Which businesses can offer this? Who can contribute? Who can participate? What are the annual allowance limits? Fast facts on the Small Business HRA All businesses exempt from the employer mandate generally, businesses with fewer than 50 full-time employees that do not offer any other group health plan can use a Small Business HRA. The company only employees cannot contribute. The company can choose between inviting all W-2 employees (part-time and full-time) or all W-2 employees working more than 30 hours per week (just full-time) limits are $4,950 for single employees, $10,000 for employees with families.* Is the monthly allowance use it or lose it? Can employees access premium tax credits? Are employees required to have health insurance to participate? Is an employee required to have individual health insurance to participate? Can employees use the allowance toward expenses incurred by their family members? *21st Century Cures Act, H.R. 34, 114th Congress, 2016, 808. No. Employees can access unused allowance funds throughout the year. Any amounts that are unused by the end of the year will remain within the company. Yes; however, there are coordination rules requiring the amount of the premium tax credit to be reduced by the amount of the company s monthly allowance. No. All employees can receive reimbursement, but must have minimum essential coverage (MEC)* to qualify for reimbursements free of income tax. *For more information on what qualifies as minimum essential coverage, see obamacare-minimum-essential-coverage. No. Yes.

15 9 What types of expenses are reimbursable? Fast facts on the Small Business HRA Reimbursable expenses include premiums for individual health, dental, or vision policies. Copays, deductibles, and other medical expenses defined in IRS Publication 502 are also eligible.* Can employees be reimbursed for an expense larger than their monthly allowance? *Publication 502: Medical and Dental Expenses, U.S. Internal Revenue Service, November 11, Yes. The Small Business HRA allows for large expenses to be reimbursed by the company over time. Employees receive an annual benefit amount that is made available through monthly allowances. If an employee s HRA balance is insufficient to reimburse the expense at the time it is verified, future monthly allowances will go toward continuing to reimburse the expense. TIP We recommend using an administration tool to ensure compliance and save time in managing required documentation and notices. See page 35 for help selecting a tool. What about a taxable raise? If you don t offer group health insurance, it might sound good to give certain employees a taxable salary increase a raise instead of offering an HRA. But there are some key differences between the two approaches you should keep in mind. Unlike an HRA, a salary increase is taxable for both the company and the employee. That s less money for the employee to use on a health insurance policy than they might receive through an HRA, and it costs the company an additional 7.65 percent in payroll taxes, which adds hundreds of dollars per year per employee in company taxes. Additionally, the salary increase is lost to the

16 10 company, even if the employee doesn t use it on health insurance or medical expenses. An HRA allows the company to keep those unused funds. There are several pros and cons to each approach you should consider. Giving employees raises might save a company from compliance requirements associated with an HRA, but most employees prefer better tax-free benefits to a pay raise. 9 Figure 5 helps you compare these two approaches. Raise HRA Excluded from payroll tax? No Yes Tax-free to employee? No Yes Employees required to purchase health insurance No No to receive? Company keeps unused funds? No Yes Compliance requirements? No Yes Required to offer to all full-time employees? No Yes Figure 5. Taxable raise vs. HRA On the next page, see how a very small business used the HRA to provide employee benefits without paying payroll taxes. 10 Q U.S. Employment Confidence Survey, Glassdoor, October 2015.

17 11 Scenario 2: 5-person dental practice Problem: A small dental practice in Washington wanted to provide health benefits to its five full-time employees; however, like many small businesses, the practice was unable to find a group health insurance policy it could afford, so it decided to offer a taxable stipend of $300 per employee instead. The taxable stipend caused the company and employees to pay full taxes both to give and to receive the contributions, and the company lost any funds the employees didn t use for health insurance. Employees didn t see the raise as a company health benefit, they saw it as a raise. Solution: The dental practice implemented a Small Business HRA and gave all full-time employees monthly allowances: Single employees with no dependents received $300 per month, and employees with families received $400 per month. Employees could then use their allowances to reimburse their individual health insurance and medical expenses. Employment Eligibility Monthly allowances status criteria Self only Family Full time 30 hours a week $300 $400 HRA design for the dental practice Results: By implementing the HRA, the dental practice was able to provide more value per dollar to employees while avoiding the taxes they would have paid by offering a stipend. Tax savings analysis Stipend Average HRA Annual reimbursements (85% utilization) $18,000 $18,000 Employee income and payroll taxes paid (25%) $4,500 $0 Company payroll taxes paid (7.65%) $1,377 $0 Total taxes paid $5,877 $0 Cost analysis for the dental practice Back to top

18 12 Reasons Small Business HRAs are good for small businesses An HRA provides value to your company Businesses benefit when they choose to implement a Small Business HRA. HRAs allow you and your company to accurately budget for health insurance and return your focus to business all while offering competitive benefits to employees. Hire and keep employees. One of small businesses toughest and costliest challenges is bringing on new hires and preventing turnover. Because employees place such a high value on benefits, offering nothing places your company at a disadvantage. Not only could you lose current employees, but you could also drive away prospective future employees who won t join a company without a health benefits solution. One in four small businesses that don t offer benefits say this has happened to them. 10 When you consider the time and resources spent on advertising open positions, interviewing candidates, and drawing up offer letters, a rejected job offer due to your lack of benefits is costly. A Small Business HRA frees you and your employees, allowing everyone to focus on the business instead of managing the complexities and rising costs of a group health insurance policy. Fix your costs. Many small businesses cut benefits due to high cost, but that s avoidable with a Small Business HRA. With this approach, your company decides how much money to put toward employee health insurance instead of having 11 Health Care & Small Business Survey, Manta, 2015.

19 13 costs dictated by insurance companies. You can also increase or decrease your company s allowances over time according to business needs. HRAs help you get insurance companies out of your calculations when you re creating your yearly budget. Concentrate on your core business. Offering group health insurance or offering nothing at all costs small businesses time, money, and productivity. A Small Business HRA frees you and your employees, allowing everyone to focus on the business instead of managing the complexities and rising costs of a group health insurance policy. See how one small business used the HRA to keep its employees. Scenario 3: 10-person advertising agency Problem: An advertising agency in California wanted to provide health benefits that were affordable and that offered quality coverage; however, because the small business had remote employees in several U.S. states, finding a group health insurance policy that covered everyone was nearly impossible. Without competitive health benefits, the agency lost one or two employees salaried at $40,000 to turnover every year. Solution: The agency decided to offer a Small Business HRA so that employees could buy insurance personalized to their needs and receive tax-free dollars from their company to cover the cost. The agency decided to give all W-2 employees monthly allowances. They provided $200 per month to single employees with no dependents and $400 per month to employees with families. Employment Eligibility Monthly allowances status criteria Self only Family Full time W-2 employee $200 $400 HRA design for the advertising agency Results: By implementing a Small Business HRA, the agency was able to offer formal health benefits to employees and eliminate benefits-related employee turnover. The company fixed its annual benefits budget at $36,000 while preventing approximately $50,000 of lost business and productivity from turnover.

20 14 Overall, the advertising agency ended up with more satisfied employees and a net gain of $14,000 annually. 11 Lost business and productivity from turnover (monthly) $4,167 HRA cost (monthly, 100% utilization) $3,000 Monthly savings with an HRA $1,167 Annual savings $14,000 Savings % 28% Cost analysis for the advertising agency Individual health insurance provides value to your employees Employees who understand the pros and cons of each option prefer individual policies to group health insurance due to two key advantages: choice and portability. Choice. With individual health insurance, your employees choose the coverage and doctor network that best fit their families needs, rather than working within a framework your company chose for them. Purchasing individual health insurance is easier than ever, 12 and employees have many options to choose from. There are four standard levels of individual health policies, called metallic tiers. Within each tier, the employee chooses their policy by insurance company, doctor network, and coverage. Portability. Individual health policies are permanent and portable, independent of a person s employment. That means your employees keep their health insurance when they switch jobs, so they no longer need COBRA coverage. This is especially valuable if an employee or an employee s family member has longterm medical conditions. 12 Christina Merhar, Employee Retention - The Real Cost of Losing an Employee, Zane Benefits blog, February 4, Brittainy Boessel, Where and When to Purchase Individual Health Insurance, Zane Benefits blog, July 7, 2016.

21 15 Employees keep their policy when they switch jobs Employees choose their coverage and doctors Premium tax credits available Coverage for preexisting medical conditions Coverage for essential health benefits Group health insurance No. No. No. Yes. Yes. Individual health insurance Yes. Yes. Yes. Yes. Yes. Who pays for the policy? The company purchases the policy. Employees reimburse the company via their paycheck. Employees purchase the policy. The company reimburses employees via paycheck. Figure 6. Group health insurance vs. individual health insurance Reimbursements to employees are tax-free Your company s monthly HRA allowances are tax-free both to the company and your employees. That means the company will save 7.65 percent in payroll taxes on reimbursements paid to employees, and employees will save 20 to 40 percent in state and federal income tax on the funds they use to reimburse themselves for health insurance premiums and other medical expenses. Think of it as a business expense account specifically for health expenses. The simplicity of this arrangement, its tax-free status, and the cost control it allows the company are all reasons many small businesses choose to set up a Small Business HRA. Back to top

22 16 Will a Small Business HRA work for my company? Whether your company currently offers health benefits or not, you should ask yourself the following general questions before proceeding with the Small Business HRA. If you answer yes to these questions, the HRA might be a terrific fit for your company. Does your company have fewer than 50 employees? A Small Business HRA is restricted to small businesses exempt from the employer mandate generally, businesses with fewer than 50 full-time employees. If you have 50 employees or more, a Small Business HRA won t work for your company. Do you have a budget to spend on employee health benefits? You must have dollars available to spend on employee health benefits. If you re unwilling or unable to set aside funds each month, a Small Business HRA will not work for your company. Do you want to grow or maintain your company size? The primary function of a reimbursement plan like the Small Business HRA is to help small businesses hire and keep employees. If you want to grow or maintain your existing staff, a Small Business HRA is a great solution for your company. Back to top

23 17 How to set up a Small Business HRA plan Once you ve decided a Small Business HRA is a good fit for your company, you re ready to begin implementation. We recommend using an administration tool to implement your company s reimbursement plan. For help selecting an HRA administration tool, see page 35. In this section, we will walk you through how to plan for and implement a Small Business HRA. First, work through the following seven steps with your company s decision makers. We will use the planning worksheet in Figure 7 to further organize the details. 1. Pick a start date. 2. If you have a group policy, set a cancellation date. 3. Confirm who will be eligible. 4. Determine a budget and set allowances. 5. Establish legal plan documents and compliant administration policies and procedures. 6. Communicate your new benefit to employees. 7. Provide resources to help employees buy individual health insurance. Start date Cancellation date

24 18 Part-time employees eligible? Self only Monthly allowances Family Start date: When would you like the plan to start? This is your plan effective date. Cancellation date (if applicable): What date will you cancel your existing group policy? Write N/A if this does not apply. Part-time eligibility: Who will you offer the HRA to? You can offer the benefit to all W-2 employees, or to full-time employees only. Monthly allowances: How much would you like to allocate monthly, by family status (self only and family)? See page 8 for federal caps on annual allowances. Figure 7. HRA implementation planning worksheet Pick a start date The first step is to pick a start date, or plan effective date. This is the date your new Small Business HRA will begin. If you don t have a health benefits plan in place, you should start your HRA immediately; however, if you have an existing group health insurance policy that needs to be canceled (see the next section), we recommend delaying the start date of your HRA to give employees time to purchase new individual coverage. If you have a group policy, set a cancellation date If you have an existing group health insurance policy, you will also need to set a cancellation date for existing coverage. We recommend setting a cancellation date the day before your HRA start date and communicating the change to employees 60 days in advance of the cancellation date. This will give employees ample time to avoid a gap in coverage as they shop for new individual health policies. TIP Canceling your existing group health insurance policy is surprisingly easy. Group policies are unilateral contracts, which means you can cancel at any time with little or no notice.

25 19 While some insurance carriers request 30 days notice, this is not always required call a customer representative with the insurance company to confirm the exact steps required to cancel. Your health insurance broker can assist you; however, your company must notify the insurance company directly. When you cancel your group policy, you trigger a qualifying event, which makes covered employees eligible to purchase a new individual health insurance policy immediately. TIP Health insurance brokers make commissions on the policies they sell. When you inform your existing broker that you intend to cancel coverage, be prepared for the broker to fight to keep your business. Confirm who will be eligible Next, you need to decide who will be eligible for your Small Business HRA. Businesses using a Small Business HRA must offer it to all full-time W-2 employees. You can also offer it to part-time employees (those working fewer than 30 hours), but you must offer the same monthly allowances to part-time employees as you do to full-time employees. Determine a budget and set allowances Next, determine a budget and set monthly allowances the amount of money eligible employees will receive each month to reimburse their individual health insurance and medical expenses. You can vary the monthly allowance based on employee family status. There are two allowances you can offer: Self only, for single employees with no dependents Family, for employees who are married, have dependents, or both For example, ABC Company wishes to offer an HRA to its five full-time employees.

26 20 Two employees are single with no dependents and three are married with children. ABC Company will offer $300 a month to its two single employees and $600 a month to its three employees with families. Later, ABC Company hires three part-time single employees and decides to include them in its HRA. To do so, ABC Company must offer each of those part-time employee $300 a month exactly what it offers its full-time single employees. With a Small Business HRA, your company has more control over its health benefits costs. There is no minimum allowance, and you can contribute up to the federal cap of $4,950 annually for the self-only allowance and $10,000 annually for the family allowance. Within that range, the budget is up to you. TIP When setting your monthly allowances, it s a best practice to calculate the maximum amount you can afford to allocate within the federal caps. This will give the best benefit possible to employees, and any unused funds stay with your company at the end of every year. Remember, if you re using a Small Business HRA, your company incurs an expense only if employees use the monthly allowance to reimburse their health insurance insurance or medical expenses. The real annual cost of your HRA will depend on how much of their allowances employees use. For example, if your company is making available $100,000 in allowances annually and employees use only 80 percent of the allowances by the end of the year, your company s annual cost will be $80,000; your company gets to keep the remaining $20,000. The example below outlines two ways to budget for a Small Business HRA if you were previously offering group health insurance. For illustration and analysis purposes, the example below assumes you were contributing $4,800 per employee per year to group health insurance.

27 21 Strategy 1: Ensure immediate company savings If your company is making available $100,000 in allowances annually and employees use only 80 percent of the allowances by the end of the year, your company s annual cost will be $80,000; your company gets to keep the remaining $20,000. If your company s group health insurance costs were unsustainable, you could use a Small Business HRA to immediately reduce your health benefits cost. In this scenario, using our example, your company might set an annual HRA allowance per employee of $2,400 per year, guaranteeing an immediate 50 percent savings. Be careful with this approach, however. The primary reason for offering benefits is to support your business in hiring and keeping employees. If you reduce benefits by too much, you may disappoint your employees. Strategy 2: Give maximum budget to employees If your company could afford to continue its group health insurance but decided to offer a Small Business HRA for other reasons, you could pass 100 percent of the budget along to employees: In our example, you would continue to allocate $4,800 per employee per year as an allowance. This means employees would have the entire $4,800 to spend tax-free on individual health insurance and medical expenses throughout the year. Establish legal plan documents The IRS and the Department of Labor require businesses offering a Small Business HRA to establish and maintain written plan documents. These documents define critical policies and procedures, such as which expenses are eligible for reimbursement, what the monthly allowances are, and other important details about a company s HRA administration. See Figure 8 for some of these requirements.

28 22 Failure to establish proper plan documents could cost your company tens of thousands of dollars per year in fines and lost tax savings. Due to the complexity of these documents and the required policies and procedures, we recommend using an HRA administration tool to create and maintain the plan documents. You can learn more about HRA administration tools on page 35. Plan document requirements Name of the Small Business HRA plan administrator Name of the HIPAA privacy officer Designation of any named fiduciaries A description of benefits provided The standard of review for benefit decisions Eligibility criteria (remember, all full-time, W-2 employees are automatically eligible) The effective date of participation (e.g., the first day of employment with the company as a W-2 employee) Amendment and termination rights and procedures, and what happens to plan assets, if any, in the event of plan termination Rules restricting and regulating the use of protected health information (PHI) Plan for coordinating the HRA with other benefits Procedures for allocating and designating administrative or documentation review duties to a Small Business HRA third-party administrator (TPA) or committee How the Small Business HRA is funded Information regarding the Employee Retirement Income Security Act (ERISA), HIPAA, and other federal mandates Internal and independent third-party appeals process for adverse benefit decisions Figure 8. Plan document requirements

29 23 Communicate your new benefit to employees Once you ve created the plan documents, you re ready to tell your employees about your new Small Business HRA. ERISA requires you to create a Summary Plan Description (SPD) of the HRA and furnish copies to each eligible employee. This document is the primary vehicle for informing employees and their families about their rights and benefits under the HRA. TIP The information you provide to employees should include their annual HRA allowance amount, how to correctly apply for premium tax credits, and how minimum essential coverage affects the way employees receive their benefits. In addition to meeting the minimum legal requirements, you should provide your employees clear, detailed guidance on how the Small Business HRA works. The greatest value of your benefits offering is its ability to help your business hire and keep talented employees. If your employees aren t using their benefits due to confusion, your business isn t receiving that value. See Figure 9 for a list of frequently asked questions. Frequently asked questions Which employees are eligible? All full-time W-2 employees are eligible to participate, and you can choose whether to include part-time W-2 employees. Can an owner participate? Only C-corp owners who are W-2 employees are eligible. When can I reimburse my employees? After an expense is verified as eligible for reimbursement.

30 24 Frequently asked questions How do I reimburse my employees? You can reimburse employees via the method of your choice payroll, check, or cash. What can I reimburse employees for? There are two categories of expenses employees and their families can have reimbursed: insurance premiums and medical expenses. Insurance premiums can only be reimbursed if they are for an individual medical, dental, or vision policy. Pre-tax contributions to a group insurance policy are not eligible. Copays, deductibles, and many other medical expenses can be reimbursed regardless of association with a group or individual insurance policy. How do I get this information in You can create a nontaxable payroll my payroll software/to my payroll line item through your payroll company? company. Simply add a new payroll item, set it to be nontaxable, and add it to each employee s record. You will then be able to add an amount on each employee s paycheck. The payroll line item is generally described as a reimbursement, noncoded or miscellaneous, addition to net income, or nontaxable. When and how do I add new New employees become eligible employees? on their start date. Add their name, contact information, job title, and direct manager to an enrollment form. Figure 9. Frequently asked questions On page 28, we provide sample templates to help you effectively communicate to your employees.

31 25 Help employees buy individual health insurance Because health insurance has traditionally been provided by the business, this will be the first time many of your employees will be responsible for choosing their own policies. For most, this is a daunting experience health insurance policies are long, full of specialized language, and difficult to compare. As a result, many of your employees will want help shopping for an individual health insurance policy. The greatest value of your benefits offering is its ability to help your business hire and keep talented employees. To show your interest in their success with the Small Business HRA, you should be prepared to provide that help. See "How to help employees purchase individual policies" on page 32 for more details on your role in helping employees buy coverage, as well as how an HRA administration tool can help. TIP Remember that under federal guidelines, your company cannot be involved in an employee s decision to purchase an individual policy or their decision of which insurer or policy to use. With a Small Business HRA, your company must limit its role to simply verifying that an employee incurred an insurance or medical expense and then reimbursing the employee. Businesses are encouraged, however, to provide employees with tools to educate themselves. Back to top

32 26 How to manage a Small Business HRA Once you have plan documents in place and you ve communicated the change to employees, you can begin administering your Small Business HRA. Update your plan concurrently with staff changes Your company will likely have staffing changes during the lifetime of your Small Business HRA, so regularly ensure the roster of employees receiving monthly allowances is up to date. This is especially important because the eligibility criteria in your plan documents must match current roster of employees enrolled in the benefit. You can do this manually each time there is an applicable staff change, or if you use a Small Business HRA administration tool you can simply click to add or remove an employee. Record reimbursements and store documentation The IRS and the Department of Labor require that employees submit proper documentation verifying their expenses and that supporting documentation is saved on file for seven years. 13 Therefore, your company should have an ongoing record of what has been disbursed through your Small Business HRA and why. This should include all reimbursement requests, the supporting documentation, and whether those requests were approved or rejected. To do this, your company s Small Business HRA administrator should review employee reimbursement requests once a month and approve qualified expenses, storing all related documentation. Keep in mind, however, that under HIPAA 14 Publication 583: Starting a Business and Keeping Records, U.S. Internal Revenue Service, January 14, 2015, 15.

33 27 privacy laws, businesses can t review employees medical information. That means you will need a third party to complete this task in order to avoid a potential penalty. 14 Software can help. The right administration tool automates the review and approval process for reimbursement requests while complying with HIPAA laws and storing all necessary documentation. Evaluate allowance amounts annually Your company can change monthly allowance amounts, provided you give adequate notice. For most businesses, it makes sense to evaluate allowance amounts as part of an annual benefits review. The right administration tool automates the review and approval process for reimbursement requests while complying with HIPAA laws and storing all necessary documentation. Back to top FR 8426 (January 25, 2013),

34 28 How to communicate a Small Business HRA to employees When your company signs up for a Small Business HRA, employees will hopefully support the change; however, if your company does not properly communicate the advantages, employees may incorrectly view the change as a benefit reduction. It s understandable after all, the number of businesses offering health benefits has declined every year for the last 17 years. 15 If you successfully communicate the benefits of individual health insurance to your employees, however, they will appreciate the new Small Business HRA and will know exactly how much your company contributes toward their health insurance and medical expenses. Communicate early and often It s vital your company is prepared to educate your employees quickly and transparently. During your initial communication, your company should be clear that by offering an HRA, you re giving employees access to better benefits by providing them with the opportunity to choose individual health insurance policies. TIP Your Small Business HRA administration tool should provide you with all necessary employee communication materials. There are numerous ways to educate employees, including: Brochures or handouts s All-staff presentations or trainings One-on-one meetings Employer Health Benefits Survey, Kaiser Family Foundation, September 14, 2016, 46.

35 29 Announce your new benefit Once you ve decided to offer a Small Business HRA and selected a software tool to help administer it, announce the new benefit. Send a company-wide letter as soon as the plan start date is finalized. A good letter will answer the following questions: What is a Small Business HRA and what is individual health insurance? How does a Small Business HRA work and how do employees purchase individual health insurance? When will the existing policy be canceled and when will the HRA start? Why is the company making this change? Figure 10 provides a sample general announcement letter for ABC Company. TIP Use the following example communications to create an employee letter or presentation slides. Customize the reasons your company is choosing a Small Business HRA and the benefits most important to your workforce. Follow up your letter with an in-person meeting. Here are a few additional ways to simply explain the Small Business HRA s value to employees in a company meeting: Your new health insurance will be portable, which means you won t lose it if you leave the company. You ll also be able to choose between a number of different policies, and your final decision will be up to you, not the company. Since you ll choose your own policy, you can pick one that includes your doctor and prescriptions instead of hoping a group policy covers them. Your allowance is completely tax-free, so the amount we re giving you is the amount you can spend. It will not be reported as income. Our group health insurance costs have become unsustainable. Instead of cutting benefits, we ve decided to reimburse you for your own individual health insurance.

36 30 Dear ABC Company Employee, After careful consideration and input from our employees, we are excited to announce new and improved health benefits. As of June 30, we will no longer offer the Aetna group health insurance policy. Instead, we are offering a new Health Reimbursement Arrangement that will allow you to purchase an individual health insurance policy and be reimbursed. Starting July 1, 2017, you will receive a monthly allowance you can spend on any health insurance policy available in the individual market. You and your family can purchase a health policy that best fits your needs. The company will reimburse you for individual health insurance and medical expenses up to your allowance each month. By offering health benefits in this way, ABC Company will reduce costs both for our company and for you and your family. There are several upsides to individual health insurance that lead us to believe it will better serve you and your family. With individual health insurance, you get to pick the policy that best fits your needs. You can pick a policy that includes your doctor, and you can keep your policy for as long as you want, even if you change jobs. It is important to our company that you receive the best health insurance for your needs at a cost you can afford. We have contracted with Zane Benefits to make this process easy for everyone. Over the coming weeks, we will provide you with more information on the reimbursement plan, your monthly allowance, and individual health insurance. We will also provide you with resources, including health insurance shopping assistance, to help you and your family purchase a new policy. We look forward to helping you transition to individual health insurance and providing you with the best health benefits available. Sincerely, Barbara Jones President and CEO Figure 10. Sample ABC Company general announcement letter

37 31 Provide a custom employee welcome letter Once you ve announced the transition, provide every employee with a custom welcome letter. Employee welcome letters should provide clear instruction on how to use the Small Business HRA administration tool and how it benefits employees. Figure 11 provides a sample communication from a Small Business HRA administration tool explaining the benefit. Congratulations ABC Company employee, ABC Company added you to a Health Reimbursement Arrangement (HRA) with a start date of July 1, ABC Company is providing you with an allowance amount that depends upon your marital status and/or number of dependents. Single: $300 per month Single with children: $600 per month Married: $600 per month Married with children: $600 per month Please verify your marital status and number of dependents on your enrollment form. You can use this allowance toward tax-free reimbursement of health insurance premiums and medical expenses. To access the HRA, follow these steps: 1. Log in to accept the benefit. Your account already exists under this address. 2. Purchase an individual health insurance policy if you don t already have one. For completely tax-free reimbursement, make sure your policy counts as minimum essential coverage. Shop online through a broker of your choice. 3. Add your policy information so we can let your company know how much to reimburse.