Boca Benefits Consulting Group Inc.

 

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Many observers see employer-sponsored healthcare benefits offered to employees as being on the cusp of major change. PPACA contains a provision which will proscribe all individual medical policy underwriting no later than March 2014.  This means that no individual can be declined when applying for an individual healthcare policy, clearly diminishing the need for group insurance plans going-forward. In addition, from 2002 to 2011 the healthcare costs for a family of four have risen from $9,235 to $19,393, a clearly unsustainable rate for both individuals and for the U.S. economy in the aggregate. Of the $19,393 current cost, approximately 42% is being borne directly by employees, more than at any time in U.S. history. Even when employers can afford to continue to provide healthcare benefits, the offerings are often perceived as not fitting the needs of specific employees which may be unique in nature. Employers are also passing along an unprecedented portion of the total annual increase as out-of-pocket costs to employees, on average  9.2%  during the 2010-2011 renewal season.  When wages and employment are stagnant, the cost of staple products such as gasoline are at record levels, and overall returns on investments are below 5%,  an annual household healthcare cost of $8,000 is more than many can handle. Lower cost alternatives that are specifically tailored to fit the needs of individual employees are critically needed. Many strongly feel the HRA approach described below is the answer.

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Q: What is the “HRA concept?”
A: In short, it is a tax advantaged method whereby employers can provide financial support to employees for the purchase of any IRS-approved healthcare product. HRA is the acronym for “health reimbursement arrangement,” a term which has been around the benefits industry for many years but which is now receiving unprecedented attention. More often than not, HRA’s are used as alternatives to traditional qualified healthplans but that is not always the case depending on the employer’s objective. Some large corporations have also used HRA’s to allow employees to tailor a mix of health product alternatives to best fit their personal needs while maintaining their own qualified health plans as alternatives. Recently, a Fortune 200 sized corporation announced that it would use the HRA approach to fulfill its obligations to future retirees by providing them a fixed allowance and having the retiree purchase the product of his/her own choice.

Q: Why is the concept receiving so much attention all of a sudden?
A: There are many reasons. However, the primary one is that the PPACA healthcare reform legislation passed in 2010 proscribes the use of medical underwriting by individual health insurance carriers no later than 2014. To date , group insurance plans, which are not medically underwritten on a person-specific basis, have been more suitable to most employers because no employees were left out. The new underwriting rules will take that advantage away from group insurance plans because no applicant for an individual policy will be denied. From an employer’s perspective, it lessens the burden of managing all the specifics of a few qualified healthplans per each geographic location (e.g., a dual offering of a PPO and POS plan). When no person can be rejected for an individual policy, the employer emphasis shifts strictly to financing.

Q: Speaking of financing, does the employer lose any tax advantage by shifting from a qualified health plan to an HRA approach?
A: HRA reimbursements for employees are considered a business expense by the IRS and are deductible just as qualified healthplan contributions presently are. Depending how the HRA and related salary reduction plans are structured, an employer can potentially increase its tax advantage via the reduced payroll and associated payroll taxes (n.b., there may also be other payroll driven charges, such as workman’s compensation premium, that are also commensurately reduced).

Q: Is it complex and/or hard to administer?
A: The answer is a qualified yes. Various administrators of flexible spending accounts (“FSAs”) under IRC Section 125 will claim unwarranted expertise. However, HRA administration is a specialized field and uniquely different than FSA administration. The entire alphabet soup of administered healthcare related programs, FSA, HSA, MSA, cafeteria plans, etc., are often confused with HRA approaches. The selection of an experienced HRA administrator with a demonstrated track record is the key to success. Some of the available administrative programs are actually patented and offered by a limited number of organizations.

Q: Can the administration be integrated into my payroll system?
A: Direct integration is not the norm. However, the best HRA administrators have proprietary management software in place to manage the HRA plan globally and make the reimbursement process as seamless as possible. As mentioned above, certain software and methods are patented and unique to specific administrators.

Q: Is there a cost consideration for employers?
A: Yes. In fact, many employers are assessing whether they can move to an HRA approach immediately in 2011. Group insurance premiums in total, the employee’s share of that premium, and the employees costs sharing when a healthcare service is rendered all continue dramatically upward. Some smaller employers feel compelled to just eliminate their qualified health plans in entirety. Some are adjusting benefits downward and passing along more costs to employees. Neither is a sustainable solution over time. These factors have caused employers to seek out more palatable ways of dealing with the cost problem.

Q: Does the HRA concept actually make the health care purchase less expensive?
A: Probably not on a truly apples to apples basis. The cost of discounted underlying healthcare services (i.e., in any form of managed care product) will not change. However, it give the employer two decided advantages. First is that, going forward, the employer can fix an annual dollar amount that it will provide to employees for the purchase of an IRS-approved healthcare product. It can be (1) the same average amount now provided as the employer’s piece of the qualified healthplan premium, (2) a reduced amount to generate costs savings while still providing substantial, albeit not the same level, of investment in employee healthcare, or (3) a substantially reduced amount which recognizes that the alternative would be the total elimination of any healthcare benefits on the part of the employer. The second advantage is that no matter at what level the dollar amount is set, the employer is not forced to design a plan where one or two options must fit the needs and desires of the entire employee group.

Q: How many plan options are available to employees?
A: Under an HRA, a certain dollar amount is made available to employees. The individual employee purchases the healthcare product that they feel best suits their needs from the carrier of their choice. There is no closed list of carriers. Often an employer will facilitate the use of a handful of carriers just to make the process easier for employees. However, the employer cannot limit the carrier or product choice on the part of an employee. Once the purchase is made directly by the employee, the employee submits a request for reimbursement under the HRA plan.

Q: My broker has told me that PPACA has eliminated different health plans for different classes of employees. Is it the same for HRAs?
A: Current IRS guidance indicates that different HRA allowances can be provided to different classes of employees. Because employees can then decide how and when to spend the allowance, no single healthcare plan can be considered discriminatory under PPACA. As with all IRS guidance, this may actually be somewhat of a moving target and an employer considering class-related allowances should seek the most current guidance before moving forward.

Q: Does the purchase have to be a full-blown individual major medical type plan?
A: No… other options are available. For those persons who don’t have the resources to purchase a product with traditional levels of benefits, there are reduced benefit products at lower costs which can be purchased from a broad array of carriers under an HRA (e.g., critical healthcare policy, limited benefits policy, minimed policy, etc.). A caution: employees should be warned to never assume the product in which they have an interest is reimbursable. Even products with similar sounding names may or may not be reimbursable from one carrier to the next. Generally speaking, individual major medical policies from recognized carriers are not problematic. However, once the HRA plan is put in place, employees should be directed to check with the administrator if there is any question about other products.

Q: Can the HRA approach be used for other solutions?
A: The answer is unequivocally yes. One example is the large employer which is self-insured. Those employers must keep a liability on their balance sheet for “incurred but not reported” claims (“IBNRs”). That liability represents claims in the pipeline that have not yet been presented for payment. In the event of termination of a healthplan, in accordance with generally accepted accounting principles, the employer must have a reserve established from which funds will be drawn to pay those claims. Typically, this reserve balance grows year to year in tandem with the increase in claims costs. The more employees that move to individual, fully insured, policies the less that is required to be carried in the IBNR reserve. This methodology requires a degree of analysis to project the employee migration from a qualified healthplan and the net effect on the IBNR reserve.

Q: Are there other solutions?

 A: Some of the approaches are below:

• Use it as a competitive hiring tool by allowing assistance with tax advantaged COBRA payment
• Use it as a competitive hiring tool by providing some form of healthcare when a substantial waiting period exists
• Use it as a competitive hiring tool in industries which typically do not broadly provide healthcare benefits (e.g., hospitality industry)
• Use it as an employee relations tool by allowing even employees with less than the minimum weekly hours to participate in some form of healthcare
• Use it as an employee relations tool by providing a tax advantaged method of paying Medicare premiums for 65+ employees (or spouses)
• Use it as an employee relations tool by providing customizable healthcare purchases for employees who receive their primary coverage via spouse and may currently feel disenfranchised
• If a start-up company, provide affordable initial healthcare benefits short of a full-blown qualified healthplan
• If facing another round of large qualified plan cost increases which must be passed along to employees, provide them with affordable options

Q: It seems that some of the above might actually damage my qualified healthplan if I offer an alternative. Is that true?
A: It is critical that an average spread of risk be held in both a qualified plan and any alternatives available via an HRA. If all the young healthy employees were to migrate to alternatives, it would certainly endanger the rating soundness of the qualified plan left with an older, higher morbidity, group. In certain instances, it might also cause the qualified plan to fall below required participation minimums, although participation in alternative coverage may be adequate to remove employees from the census when making that calculation.

Q: How do I know if I will have the average spread of risk you mention?
A: Many employers have offered voluntary benefits for years. If any tax advantage was to be had, it was only via limited salary reduction via FSA contributions and the related payroll tax offsets. Generally speaking, employers have not done any kind of analysis related to the strategic placement of voluntary benefits to enhance overall company benefits objectives. As the sea-change noted here gains momentum, it is critical for employers to utilize the services of carriers which not only make products available but which can do sophisticated modeling relative to the placement of voluntary products. Employers should be wary of just accepting a laundry list of products the carrier indicates are available without projecting the net impact of those purchases.

Q: You mention voluntary products? Is that the same as an HRA plan?
A: No. However, the purchase of anything, and its ultimate reimbursement, under an HRA is always voluntary. Some of the alternative products will come from an employer-endorsed voluntary products carrier whereby the employer has made it easy via payroll deduction. However, the HRA plan cannot be limited to that single carrier. Also, much of the HRA participation will be in individual major medical policies purchased from carriers other than the endorsed voluntary carrier. Again, the carrier selection cannot be limited by the employer. The integration of existing voluntary plans (i.e., via FSA) needs to be closely monitored to ensure for proper tax treatment.

Q: If voluntary benefits are only a small part of the HRA concept, why should I rely on a carrier to do a strategic analysis?
A: The best voluntary carriers can do modeling which goes beyond just their own products. As should be clear, projecting the impact of alternatives to an existing qualified healthplan is more an art than a science. It comes down to best guesses and reasonable assumptions. Utilizing the resources of those best positioned to assist an employer only makes sense.

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