Life & Health Insurance Exam (National Portion)Taxes, Retirement, and Other Insurance ConceptsMedium
A small business owner wants to provide health insurance to their employees but is concerned about the high cost of traditional group plans. They are considering a plan where the employer contributes to individual health insurance premiums for employees. Which arrangement allows for this with favorable tax treatment?
- AA health reimbursement arrangement (HRA).
- BA defined contribution pension plan.
- CA Health Savings Account (HSA) for each employee.
- DA flexible spending account (FSA).
Show answer & explanationAnswer & explanation
Correct answer: A. A health reimbursement arrangement (HRA).
A health reimbursement arrangement (HRA) is an employer-funded plan that reimburses employees for out-of-pocket medical expenses and, in some cases, individual health insurance premiums. Contributions are tax-deductible for the employer and tax-free for the employee.
Why the other options are wrong
- B. A defined contribution pension plan is a retirement plan, not a health benefit arrangement.
- C. HSAs require a high-deductible health plan (HDHP) and are primarily employee-owned, though employers can contribute.
- D. FSAs are employee-funded (though employers can contribute) and 'use-it-or-lose-it' accounts, not primarily for individual premium reimbursement.
Health Reimbursement Arrangement (HRA)
An employer-funded health benefit plan that reimburses employees for out-of-pocket medical expenses and sometimes individual health insurance premiums, tax-free.
- Employer-funded, not employee-funded.
- Contributions are tax-deductible for the employer.
- Reimbursements are tax-free to the employee.
- Unused funds can often roll over to the next year.
Memory trick: Employers Reimburse for Health, so HRA is the way.