Should I just drop group health insurance and offer an HRA instead?

Posted on Dec 2, 2012

In an effort to dodge some of the rules and challenges that are part of Health Care Reform, some “slick” sales organizations are encouraging Colorado employers to just “get out the health insurance game” and offer a Health Reimbursement Arrangement (HRA) instead. Here is one of the marketing e-mails that we just received.

Their pitch sounds appealing — just set up a fixed dollar benefit for employees and then let employees pick their own individual health insurance policy. They say that the employer can still deduct this contribution as a business expense, and the benefit is also tax free to the employee. Sounds great, huh? But, there are a couple problems with this approach:

1. Currently, and for the remainder of 2013, individual health insurance plans are still medically underwritten. This means that there is no guarantee that your employees and/or their families will qualify for an individual health insurance plan. In fact, some employees may find out that they are uninsurable. Ouch.

2. Even though this “pitch” claims that by setting up an HRA, the employer is “getting out of the insurance business”. That is not just misleading…it is dead wrong! By setting up an HRA and paying individual health insurance premiums through the HRA, the employer is actually jumping even deeper into the health insurance business. Why? Because HRAs ARE HEALTH PLANS and THEY ARE SUBJECT TO THE SAME RULES AND REGULATIONS AS ANY OTHER HEALTH PLAN OFFERED IN THE STATE OF COLORADO. Specifically:

“But my insurance agent said that paying for individual health insurance through an HRA is a good idea.”
Let me be direct. Fire him or her. They are just looking for a way to sell a bunch of individual health insurance policies to your employees OR they are uninformed. In either case, if they are doling out this kind of advice, they are not worthy of your business. By running individual health insurance premiums through an HRA, they are placing you AND your employees in a very precarious position. A position that puts you deeper into the health insurance business than you would ever care to be. And, in a position, that creates substantial (and, potentially business killing) liability.If you want sound advice, without the spin, and without putting your business and your employees at substantial risk, give us a call. Our mission is to help you (and your employees) to protect your health and wealth. We won’t recommend or implement anything that would put you at risk like this. Moreover, please know that we are committed to staying on top of the changes that are coming in our industry.

Bottom line…
Sage Benefit Advisors specializes in Colorado Group Health Insurance.


  1. Hi,

    Nice post ! thanks for sharing.

  2. would using a Premium Reimbursement Arrangement be the better approach? i.e. PRA is sec 125…employer could make contribution for employee to buy indiv plan and employee contrib run through PRA

    • I believe this practice is fraught with difficulty. – an article that speaks to some of the issues of concern. I’ve also copied and linked to IRS regs – there is a way to do this. That being said, recent guidance, especially as it relates to using an HSA to accomplish this as of 2014 – appears to be ending this practice. I urge caution and suggest that you ask any vendor for legal opinions or for a hold harmless for the employer should the plan not pass muster with the IRS.

      Employer-Provided Accident and Health

      Coverage under an employer-provided
      accident and health plan that satisfies
      the requirements of section 105(b) may
      be provided as a qualified benefit
      through a cafeteria plan and is
      excludible from employees’ gross
      income. Section 106; § 1.106–1. The
      nondiscrimination rules under section
      105(h) apply to self-insured medical
      reimbursement arrangements (including
      health FSAs).
      The new proposed regulations
      specifically permit a cafeteria plan (but
      not a health FSA) to pay or reimburse
      substantiated individual accident and
      health insurance premiums. See Rev.
      Rul. 61–146 (1961–2 CB 25), see
      § 601.601(d)(2)(ii)(b). In addition, a
      cafeteria plan may provide for payment
      of COBRA premiums for an employee.
      For employer-provided accident and
      health plans and medical
      reimbursement plans, the definition of
      dependents is the definition in section
      105(b) as amended by the Working
      Families Tax Relief Act of 2004
      (WFTRA), Public Law 108–311, section
      207(9) (118 Stat. 1166) (that is, a
      dependent as defined in section 152,
      determined without regard to section
      152(b)(1), (b)(2), or (d)(1)(B)). See Notice
      2004–79 (2004–2 CB 898), see
      § 601.601(d)(2)(ii)(b). For purposes of
      the exclusion from employees’ gross
      income for accident and health plans
      and for medical reimbursement under
      sections 105(b) and 106, the spouse or
      dependent of a former employee
      (including a retired employee or a laidoff
      employee) or of a deceased employee
      is treated as a spouse or dependent. See
      Rev. Rul. 82–196 (1982–2 CB 53); Rev.
      Rul. 85–121 (1985–2 CB 57), see
      § 601.601(d)(2)(ii)(b).

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