Good news for small business HRAs

Recently released industry data shows that qualified small employer HRAs fared well in their first year of operation under liberalized tax laws. The new plans are called “Qualified Small Employer Health Reimbursement Arrangements” or “QSEHRAs”. It appears that HRAs enable small businesses to effectively compete with larger businesses offering group health insurance. Additionally, it appears that smallest firms with 1 to 4 employees have used HRAs most effectively to complete favorably with larger firms that offer group health insurance.

  1. The maximum legal allowance increased slightly for HRAs for 2020 to $5,250 for individuals, $10,600 for families. One of the primary benefits of HRAs is that they allow employers to control their costs. Most employers that offer HRAs, especially those with more than 4 employees, offer benefits less than this amount in their HRAs (see #3 below).
  2. Less than 1 in 5 employees eligible for HRA benefits use their annual total maximum allowance. This is important because it shows that for most employees, the HRA offers full coverage despite its limits on maximum benefits.
  3. In 2019, the average maximum allowance for benefits is amounts for single employees was $280/month (81% of the legally allowable maximum benefit) and $514/month for employees with a family (59% of the legally allowable maximum benefit).
  4. Despite insurance costs increasing, claims to HRAs decreased over the past year. Since there is some evidence that
  5. Employees participating in a HRA submit an average of 12 claims per year.
  6. The six most common non-premium reimbursements employees submitted include: insurance premiums (typically either 100% or 0% of employees depending on plan design), prescription drugs (55% of employees), medical office visits (45% of employees), chiropractic care, dental care and mental health counseling.
  7. The smaller the company, the higher the average monthly allowance. This may reflect nepotism is small firms. For example, some HRAs are set up to cover the spouse as the only employee.
  8. HRA allowances mirror the cost of health insurance. The states with the highest average health insurance premiums typically have higher HRA plan allowances to cover the higher premiums. Examples are Connecticut, Rhode Island, and North Dakota. Conversely, the states with lover average insurance premiums tend to have lower HRA allowances. Examples are Nebraska, Arkansas and New Hampshire. Increases in HRA allowances correlate with increases in health insurance premiums.

Taken collectively this dats provides evidence that HRAs are working for small businesses, are saving money, . I offer several types of HRA plans at no additional charge to small business accounting clients. For more information, see www.FreedomBenefits.org.

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