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Add HRAs to your client’s tax planning toolkit

Noncash compensation alternative to raising wages

By Margaret Lett, PhD

November 15, 2021

Negotiation for higher pay and promotions is happening at the speed of Silicon Valley on espresso. With a wage war in many sectors, what more can employers provide to tip the balance for staff retention?
How about pretax health care benefits to full-time and part-time workers alike?
While some small employers embrace traditional group health insurance, others have always intentionally avoided the concept. Belief persists that group health benefits are too expensive to offer to all employees, but frequently increasing base pay is not the answer either.
Instead, small employers can explore noncash compensation that reimburses their employees for health insurance premiums and/or expenses they will have anyway. Plus, employees could pay less in payroll and income taxes in the long run. 

Introduce HRAs to your small business clients

An HRA, or health reimbursement arrangement, allows employers to reimburse their employees —income tax free — for the premium costs of individual or family health insurance. The reimbursement can extend to Medicare costs, dental insurance, vision insurance and out-of-pocket medical expenses.
Employers have some flexibility to craft a plan design that meets their own priorities and goals. For example, an employer can set a budget, say $300 a month, to reimburse employees for their individual or family health insurance premium. The employer also has the option to scale the reimbursement amount by age, allowing employees who pay more for insurance to receive a larger HRA allowance. The reimbursement can also vary by geography, union membership, date of hire, part time versus full time and other criteria.
Small businesses with remote employees, for example, can offer an HRA benefit regardless of their employees’ geographic location.
Using Section 125 Cafeteria Plans, employers can deliver additional tax savings to the employee and the employer. When the insurance premium is $500, but the monthly reimbursement is $300, there is still the additional $200 the employee is paying out-of-pocket each month. This amount can be deducted pretax from the employee’s paycheck under the Section 125 deduction, and then returned to the employee in the form of an expense reimbursement. This monthly deduction lowers the employee income by $2400 annually, saving the employee payroll and FICA taxes and saving the employer FICA taxes, too.
Different strategies are forming now in the Minnesota healthcare marketplace. Employers are offering Individual Coverage HRA (ICHRA) contributions, large and small, to provide competitive, nontaxable compensation to their employees to cover health insurance costs. A Qualified Small Employer HRA (QSEHRA) may cover nongroup health insurance premiums plus certain employer-approved health expenses.
By exploring and including HRAs as part of your tax planning consultation with small business clients, you can help them offer compensation alternatives that attract a variety of talent. We have seen HRAs work very well for:
  • Young employees moving off their parents’ health insurance.
  • Full-time employees moving to part-time employment who still need cost-effective health benefits.
  • Part-time employees who struggle to afford health insurance. 
In a job climate where every dollar counts, bring these ideas to your clients, and refer them to a benefits provider that really understands HRA and Section 125 options as part of the overall benefits package.
Margaret Lett, PhD, is founder of Benafica, a Twin Cities consultancy to deliver a better health care benefits ecosystem to employers and their teams, with Benngi technology for individualized insurance reimbursement management and secure health care records storage.