HRA Coverage Gaps: What Your Clients Need to Know Beyond Their Health Plan

Understanding the Hidden Costs in Standard Health Plans

When small business owners and HR professionals review their health plans, they typically focus on monthly premiums and headline deductible amounts. But the real financial burden for employees often lies in areas that aren’t immediately visible: deductibles, copayments, coinsurance, and services that fall outside standard coverage entirely.

A standard PPO or HDHP can leave significant gaps in employee financial protection. An employee might have a $2,500 individual deductible, face 20% coinsurance for specialist visits, or discover that certain preventive services require out-of-pocket costs. When these gaps accumulate, they create financial stress that impacts employee retention, productivity, and job satisfaction.

This is where Health Reimbursement Accounts (HRAs) become powerful tools—not as replacements for health insurance, but as strategic gap-fillers that enhance your overall benefit package.

What Are the Most Common Coverage Gaps?

Deductible Exposure

The deductible remains the largest out-of-pocket burden for most employees. In 2024, the average employee deductible for individual coverage hovers around $1,600-$2,000 for PPO plans, with HDHP deductibles often ranging from $1,500 to $3,000 or higher.

Before an employee receives insurance benefits, they’re paying 100% of covered medical expenses. This gap can be particularly painful in families where multiple members need care early in the plan year. An HRA can reimburse deductible expenses, meaning employees don’t have to deplete savings before insurance kicks in.

Copayment and Coinsurance Costs

Beyond the deductible, employees face ongoing copayments and coinsurance:

• Specialist visits: Often $40-$75 per visit, with patients seeing specialists multiple times per year
• Urgent care: $100-$150 per visit for conditions that don’t warrant emergency care
• Coinsurance percentages: 15-20% of negotiated rates for major services like surgery or imaging

These predictable but variable costs add up quickly. An HRA can systematically reduce these expenses, improving employee cash flow throughout the year.

Services with Limited or No Coverage

Certain healthcare services receive limited coverage or fall outside standard plan designs:

• Dental care: Many standard plans don’t include dental, or include it with high out-of-pocket maximums
• Vision services: Routine exams and glasses/contacts often require separate coverage
• Prescription drugs: High deductibles or limited formulary access can make medications expensive
• Behavioral health: Mental health services sometimes carry higher copayments than physical health services
• Preventive services not mandated by law: While ACA-required preventive care is free, many beneficial preventive services (nutritional counseling, fitness programs, wellness screenings) aren’t covered

Prescription Drug Costs

Pharmacy benefits are particularly complex. A plan might cover 80% of a medication’s cost after the deductible, but if the medication costs $500/month, the patient still pays $100/month out-of-pocket—even after their deductible is met. For chronic conditions requiring ongoing medications, this represents thousands in annual expenses.

HRA funds can be used for prescription drug copayments and coinsurance, giving employees predictable access to necessary medications.

How HRAs Fill These Gaps

A Health Reimbursement Account is an employer-funded account that reimburses employees for eligible medical expenses. The key advantage: the money is pre-tax for employees and tax-deductible for employers, making it more efficient than simply raising salaries.

The HRA Advantage in Benefit Design

When integrated strategically, HRAs allow you to:

Reduce employee financial barriers to care — When employees know they can get reimbursed for deductibles and copayments, they’re more likely to seek preventive and necessary care rather than delaying treatment due to cost.

Improve recruitment and retention — Healthcare benefits rank among the top factors job candidates evaluate. An HRA significantly enhances the perceived value of your benefits package, especially for smaller employers competing against larger competitors.

Maintain plan flexibility — You can design an HDHP with a higher deductible (reducing premiums) and fund an HRA to cover that deductible. This gives you control over your total benefit spend while providing comprehensive coverage.

Control costs predictably — Unlike claims-driven expenses, you set the HRA contribution amount annually. This creates a predictable benefit budget.

Strategic HRA Design: Practical Examples

Let’s look at how different HRA structures address specific gaps:

Example 1: Deductible Bridge Strategy

Scenario: Small manufacturer with 30 employees choosing a $2,500 individual deductible PPO to keep premiums manageable.

The gap: Employees face significant out-of-pocket costs before insurance activates.

The HRA solution: Establish an HRA with a $2,000 annual contribution per employee that reimburses deductible expenses. Employees effectively have a $500 deductible instead of $2,500, while your total benefit cost (premiums + HRA funding) remains competitive.

Example 2: HDHP + HRA Combination

Scenario: Tech firm wants employees to have skin in the game through higher deductibles but recognizes this creates affordability issues.

The gap: HDHPs shift more risk to employees, potentially discouraging necessary care.

The HRA solution: Pair a $3,500 individual deductible HDHP with an HRA that contributes $2,500 per year. Employees have incentive to shop carefully (deductible remains meaningful) while HRA funds reduce financial hardship.

Example 3: Supplemental Coverage Approach

Scenario: Service company offers a basic PPO but wants to improve coverage for common, predictable expenses.

The gap: Copayments for frequent visits (mental health, physical therapy, specialist care) create barriers.

The HRA solution: Fund an HRA at $1,500 per employee specifically for copayment reimbursement. This targeted approach dramatically reduces friction for employees needing ongoing care.

Regulatory Considerations and Compliance

Before implementing an HRA, ensure you understand current regulations:

IRS Section 223 coordination: If you’re pairing an HRA with an HDHP, the IRS allows specific integrated arrangements. Individual Coverage HRAs and Qualified Small Employer HRAs have different rules—consult a compliance expert to ensure your design qualifies.

ERISA compliance: As a self-funded or fully insured health benefit plan, your HRA must comply with Employee Retirement Income Security Act requirements, including proper plan documentation and claims procedures.

ACA requirements: HRAs must comply with ACA preventive care mandates and cannot be used as a standalone replacement for health insurance.

Plan documentation: Your HRA requires a written plan document outlining eligible expenses, contribution amounts, carryover rules, and claims procedures.

Communication: Helping Employees Understand Their HRA

A well-designed HRA provides little value if employees don’t understand how to use it. Effective communication should include:

• Clear explanations of which expenses are eligible
• Instructions for claiming reimbursement (receipts, submission process, timeline)
• Examples showing how the HRA reduces their out-of-pocket costs
• Annual benefit statements showing their HRA balance and usage
• Integration with payroll systems so reimbursements are processed smoothly

Many employees mistakenly believe an HRA works like a debit card or HSA (Health Savings Account). Clarifying that it’s a reimbursement account prevents confusion and frustration.

Making the Case to Your Leadership Team

If you’re recommending an HRA to company leadership, frame it around business outcomes:

• Productivity: Employees with better health benefits take fewer sick days and experience less health-related stress
• Retention: The cost of replacing an employee (typically 50-200% of salary) far exceeds the cost of improved benefits
• Recruitment: Stronger benefits = stronger candidate pool = better hiring outcomes
• Predictability: Unlike insurance claims, HRA costs are fixed and controllable
• Tax efficiency: HRA contributions are pre-tax, making the benefit more cost-effective than salary increases

Next Steps: Implementation

Ready to explore HRAs for your organization? Start with these steps:

1. Assess your current gaps: Analyze claims data or survey employees about their biggest healthcare cost concerns
2. Evaluate HRA options: Work with your benefits advisor to determine if an Individual Coverage HRA, QSEHRA, or integrated HRA works best
3. Model the costs: Compare the cost of your current plan versus a higher-deductible plan + HRA combination
4. Ensure compliance: Have your HRA plan document reviewed by someone familiar with current IRS and DOL regulations
5. Plan communication: Develop materials explaining the HRA and how employees access it

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Conclusion

Health plans are rarely perfect. But strategic gap-filling tools like HRAs can transform an adequate plan into a truly valuable benefit that resonates with employees and supports your business goals.

The most successful benefits strategies don’t rely on a single tool—they layer different elements together. HRAs are particularly valuable because they’re flexible, tax-efficient, and directly address the out-of-pocket costs that burden employees most.

If your current plan leaves significant gaps, it’s worth exploring how an HRA could enhance your overall benefits strategy and strengthen your employee value proposition.

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Nexus Benefit Solutions is an independent employee benefits advisory firm based in West Michigan. Questions? Reach out at jason@nexusbenefitsolutions.com or call 616-425-9740.