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Cutting Small-Business Health Coverage Risks With HMRAs

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For advisors, knowing only the basics with respect to health insurance coverage is no longer sufficient—they must go above and beyond to help small-business clients develop strategies that actually work for them. Because of the complexities that have emerged in the post-ACA world, questions regarding health care planning are actually some of the most frequently encountered issues that advisors face. This is perhaps most apparent in the small-business health insurance arena. 

Small-business owners that are not strictly required to offer health coverage may be struggling to find ways to offer such coverage while simultaneously controlling costs. Combining a traditional HRA with an employer health matching reimbursement account (HMRA) can provide a valuable compromise solution—providing health benefits while at the same time limiting the employer’s risk exposure.

HMRA Strategy

In the past, health reimbursement arrangements (HRAs) were a relatively simple way to offer employment-related health benefits when standard health insurance was a prohibitively expensive option. Today’s ACA rules require that the small-business employer couple the HRA with another form of health insurance, making lower-cost, high-deductible health plans (HDHPs) especially attractive to the employer.

The HMRA is essentially a health reimbursement arrangement for the employer itself—the employer funds the HMRA to protect against the risks of the cost of health coverage and excess, unpredicted medical claims. The employer contributes to the HMRA each month and, once sufficient funds have accumulated, reimbursements for substantiated employee medical expenses (including employee medical expenses that the employer has committed to reimburse) are received tax-free by the employer (or the employer can elect to have the reimbursements transferred directly to employees).

HMRA funds can also be used to reduce employee’s deductibles and cost-sharing requirements that are imposed by the employer with respect to the HDHP or other group health plan.

Generally, the employer’s contribution (which is also tax deductible) and overall account balance cap per employee-member must be the same each month for each employee-member (contribution levels range from $50 to $300 per month, while overall balance caps generally range from $5,000 to $50,000).  The overall cap essentially means that once the cap is reached, the employer will no longer make HMRA contributions with respect to the particular employee until he or she files a claim for medical expense reimbursement.

Current Complications With HRAs

In recent years, the Treasury has issued guidance that prohibits the use of most standalone HRAs, which are vehicles that have commonly been used to reimburse employees for out-of-pocket health expenses, as well as the cost of premiums for individual health insurance coverage purchased independently by employees. Because only an employer can contribute to an HRA, it is treated as a group health plan that is subject to the ACA market reform provisions, including the prohibition on annual benefit limits (by definition, an HRA imposes an annual benefit limit because the employer contributes a fixed amount).

As a result, employers that offered a stand-alone HRA would become subject to a $100 per day, per employee penalty, up to a cap of $36,500 per year—which caused many employers to discontinue HRA programs, or combine HRAs with other forms of group health insurance.

An employer is permitted to offer an HRA that is integrated with other group health coverage in order to avoid violating the prohibition on annual benefit limits. Generally, if the employee is enrolled in a group health plan (or a spouse’s employer-sponsored group health plan) that does not violate the ACA market reform provisions, an HRA can be integrated without penalty (note that an HRA cannot currently be integrated with individual health coverage purchased through the health insurance marketplace).

Further, the employee must be given the opportunity to opt out of the HRA coverage. HRAs that are offered to fewer than two current employees (including retirees) are exempt from the market reform provisions.


HRA and other employer-sponsored health funding mechanisms have grown exponentially more complicated under the ACA rules, motivating many small-business employers to stop offering health benefits altogether. The HMRA strategy is one that can allow small-business owners to help insure themselves against the risks of offering coverage, while still providing employer-sponsored health benefits to retain and motivate employees.

Originally published on Tax Facts Onlinethe premier resource providing practical, actionable and affordable coverage of the taxation of insurance, employee benefits, small business and individuals.    

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