For employers struggling with high claims against their health insurance plan and subsequently high premiums, building a budget-friendly benefits package that’s also attractive to current and potential employees can seem like threading a microscopic needle. But it is possible to offer impactful benefits that can both improve employees quality of life and company operations.

One of these impactful, yet economic benefits is the Post-Deductible Health Reimbursement Account (PDHRA). It can be paired with any type of group health insurance plan, but is particularly effective when bundled with a High Deductible Health Plan (HDHP) and Health Savings Account (HSA). It can help companies contain health insurance costs, lower tax liabilities, improve recruitment and retention efforts, and more.

What is a PDHRA?

A PDHRA is an employer-funded account through which employees can reimburse for approved out-of-pocket expenses.

A Post-Deductible HRA (PDHRA) is an employer-sponsored, employer-funded account through which employees can reimburse for medical expenses on the IRS Section 213(d) list, including coinsurance obligations, co-pays and expenses that would count toward their medical deductible. The list of eligible expenses can be customized by the employer.

Reimbursements employees make through PDHRAs are tax-deductible to the employer and tax-free to the employee. What makes these types of HRAs different from the other types of HRAs is that the employee must spend a certain amount out-of-pocket before they can reimburse for expenses. The amount they must spend is referred to as the HRA’s deductible.

Since these accounts are employer-owned, the employer can structure the benefit however they want. They can choose the deductible amount, how much they will allocate to each account (the IRS doesn’t place annual limits on these accounts), they can choose to narrow the list of eligible expenses, and more. To offer a PDHRA, an employer must also offer a qualifying group health plan and the employee must be enrolled in a group health plan in order to participate in the HRA.

How does a PDHRA Work?

Since these accounts are customizable, there are many decisions employers will need to make in order to craft the most impactful benefit that allows them to maintain fidelity to their budget. Here are the decisions and rules that govern how an employer’s PDHRA will work.

1. Which group health insurance plan will you offer? In order to offer a PDHRA to your employees, you must also offer a group health insurance plan. Likewise, in order for employees to participate in the PDHRA, they must be enrolled in their employer’s group health insurance plan.

2. Which benefits administrator will you work with to offer this account? The success of this benefit, both in terms of employee adoption and in terms of it helping the company to reach its business goals, will depend heavily on which benefits administrator you choose to partner with. 

3. How much you’ll allocate to each account.

4. The deductible that employees must meet prior to reimbursing for expenses. When choosing your deductible keep one rule in mind: a PDHRA can be paired with a Health Savings Account (HSA) as long as the deductible for the HRA is equal to or higher than the corresponding HDHP’s deductible. Bundling your PDHRA with an HDHP/HSA combination can not only help you reduce your overall health insurance spend, but it can also reduce your tax liabilities and improve employees’ physical and financial health.

5. What are the expenses the PDHRA would cover? And whether or not you will further restrict the eligible expenses that the IRS allows to be reimbursed through the PDHRA.

Once you’ve designed your plan, employees will sign up for their group health insurance plan and the PDHRA during open enrollment. They will have to submit proof of participation in the group health plan prior to being able to reimburse for expenses through the account. Once employees have met their deductible for the PDHRA, they can pay themselves by submitting a manual claim through the benefit administrator’s system. Employees can choose to have their reimbursements get directly deposited into their bank account or they can choose to receive a check.

Why companies should offer a PDHRA

Whether you offer a PDHRA, you can enjoy lower health insurance premiums, lower annual premium increases, increased productivity among your workforce, improved retention and recruitment efforts and more. This is why.

• Lower health insurance premiums. Many factors affect the cost of health insurance premiums, two of those are the number of claims plan participants make against the insurance carrier and the type of group health insurance plan you’ve arranged for employees. To lower your health insurance premiums you can do two things: offer an HDHP bundled with an HSA and PDHRA alongside it. The HDHP will lower your annual health insurance spend immediately since these plans have the lowest annual premiums of the traditional health plans. And the HSA and PDHRA will help incentivize employees to sign up for the cheaper health plan because they have a way to save and pay for the higher deductible tax-free. 

• Lower annual premium increases. If your company is struggling with a high number of claims against your insurance carrier, providing employees with another way to pay for health insurance costs through a PDHRA can help reduce those claims. The lower your claims, the lower your annual premium increases are likely to be.

• Increased productivity. A healthy workforce is a productive workforce. By providing employees with a way to pay for health-related costs, you help to ensure they seek the medical attention they need before their conditions worsen and require more serious (and expensive) treatment as well as more time off of work.

• Improved recruitment and retention. The quality of a company’s benefits package is frequently a determining factor when employees are deciding between competing job offers. In addition, employees in a recent survey cited poor benefits as being a prominent reason they were looking for a new job. Benefits matter because they support employees’ physical, financial and mental health. They signal to employees how much the company values them. If you offer impactful benefits that help employees with real, everyday costs like healthcare, it can help improve how they feel about the company which will make them more likely to stay (or take the job).

• Save on taxes. Each employer contribution to employees’ PDHRAs is tax-deductible as a business expense. 

• Help employees improve their financial health by saving their contributions to their HSAs for future use. Since HSA contributions roll over from year-to-year and can even be used to save for retirement, helping employees keep as much money in these accounts as possible can go a long way toward improving their financial health. Employees are expressing increased feelings of financial stress and even report spending 156 hours over the course of a year being distracted by their finances. By offering your employees “free money” in order to pay for important medical expenses, while they save their HSA contributions, an employer can go a long way toward helping them to feel more financially secure.

What do PDHRAs cover?

Account holders must meet their health insurance plan’s deductible before they can reimburse for their eligible out-of-pocket expenses. Once they meet said deductible, here’s a breakdown of the eligible expenses for each account. 

PDHRAs can be used to pay for the following types of expenses:

• Copays

• Co-insurance responsibilities

• Out-of-pocket costs like sick visits

• Prescriptions

• Blood tests

• Dental care expenses

• Vision care expenses

• Medical equipment

• Eyeglasses

• Inhalers 

• Other expenses that would count toward the PDHRA account holder’s health insurance deductible.

• Other expenses related to medical care and tests needed for the diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body.  

Note: this list can be further restricted by the employer

How PDHRAs work with HSAs

PDHRAs are compatible with HSAs, provided that the employer takes care to ensure their PDHRA’s deductible is equal to or greater than their group HDHP’s applicable deductible for that year. 

Here’s how PDHRAs can work together to lower employer’s health insurance premium increases, lower their tax liabilities and improve employees’ physical and financial health.

1. Employees can use their HSA contributions to pay for expenses tax-free (which means they can save up to 30% on the retail price of those expenses) prior to meeting their deductible for the year, then use their PDHRA for expenses once they meet that threshold. This gives employees more incentive to sign up for the health insurance plan with the higher deductible and lower monthly premium.

2. Two ways for the employer to save on taxes. All employee contributions to their HSAs are made prior to income taxes being assessed, which reduces the employer’s FICA tax responsibility. In addition, employer contributions to the HSA and PDHRA may be tax-deductible as a business expense.

3. Improve employees’ financial health. They can use their HSA to save for health-related costs prior to meeting their deductible, then, once the deductible is met, they can use their PDHRA while saving their remaining HSA contributions for the future (even retirement). Some HSA administrators (like Lively) allow account holders to invest their contributions so they grow at the rate of the market. This can further improve employees’ financial health.

4. Employees have access to the money they need to pay for necessary medical care. With two pots of money to draw from (their own health savings and their PDHRA), employees are less likely to put off the treatments and procedures they need in order to perform as their best selves.

If you’re an employer struggling to get a handle on health insurance premiums while simultaneously trying to support your employees, a PDHRA could be the answer you’re looking for. And if you pair it with an HDHP and HSA combination, you could get even closer to building out the most impactful benefits package for your budget. If you’re ready to uplevel your benefits, reach out to Lively today.