Health Reimbursement Arrangement Considerations

Health Reimbursement Arrangements are employer initiated and Internal Revenue Service sanctioned programs that allow an employer to reimburse medical expenses paid by participating employees in a manner that yields tax benefits and cost advantages to offset qualified healthcare expenses.

HRA Requirements:

The primary requirements for an HRA are: (1) that the plan must be funded solely by the employer and can not be funded by employee compensation reduction; and (2) that the plan may only provide benefits for substantiated and qualified medical expenses. If the plan provides payments for benefits that are not qualified and approved, all payments made by the plan will become taxable and the plan may, in effect, become mute.

HRA documents and procedures must comply with a variety of statutory rules and regulations, including COBRA, ERISA and HIPAA, that previously appeared contradictory and confusing. Most insurers that write HRA-related insurance plans now have plan templates that avoid problems.

Criteria and qualifications for payments made under the HRA plan must be described in plan documents at inception. Arrangements may vary from plan to plan as long as they meet IRS requirements. An employer may have multiple HRA plans, allowing flexibility, although most have only one plan. Payment under an HRA can be made to current and former employees, to spouses and dependents of employees and to spouses and dependents of deceased employees.

The employer is not required to prepay into a fund for reimbursements, but can pay employee claims as they occur. Any sums in an HRA fund remain under the ownership and control of the employer, unless the employer specifies otherwise. Fund balances can be rolled over year-to-year, so they are not subject to “use it or lose it” issues.

Advantages For Employers:

Tax Deductible – Reimbursements are deductible;

Reduced Premium – Unlike HSA’s, HRA’s do not require use with a high deductible health insurance plan. However, HRA’s are best utilized in conjunction with high deductible plans that can offer premium savings of up to 25 to 30 precent;

Cash Flow – With no requirement to pre-fund an account, plan payments can be made as incurred from a general business account. This flexibility allows for greater control of cash flow;

Plan Design Flexibility – With no pre-set government limits or design criteria, the employer can determine the maximum annual reimbursement limit, the sequence of payments in plan design, and the annual rollover features;

Increases Employee Participation – An HRA forces employees to make decisions about their medical affairs and encourages them to become smarter healthcare consumers, especially when used in alliance with our Medical Self Care, Personal Fitness and Patient Care plans;

Achieve Employee Benefit Goals – When you combine the benefits of an HRA with the reduced costs of a high deductible health plan and with the assistance and advocacy plans of our Fitness Culture program, an employer can achieve employee benefit goals while reducing costs and responsibilities.

Disadvantages For Employers:

Ownership Limitations – Self-employed persons, partners or employees owning more than two percent of stock in an s corporation and highly-compensated participants are ineligible to be reimbursed or may be subject to limitations;

Employer Benefit Responsibilities – Because an employer remains “in the loop” of paying medical reimbursements for employee claims under the HRA plan, the employer is not able to severe the health benefits responsibilities as may be desired and as can be the case with the HSA-high deductible plan option. However, the use of Third Party Administrators and of our Fitness Culture assistance and advocacy programs can reduce employer responsibilities to a mere trickle compared to previous duties.

Plan Design Options:

As illustrations of plan flexibility options that an employer might consider, the following four examples are offered:

A. Employee Pays First – In this design, the employee deductible (say $1,000) would apply first, so the employee would pay the first $1,000. The HRA payments would apply second, so the employer would pay the second tier, say another $1,000. Then the health insurance plan, with a $2,000 deductible would apply. This design saves the employer the most, with reduced premiums for the high deductible plan, and encourages employee use of healthcare services;

B. Employer Pays First – In this design the employer and employee reverse positions from design A. The employer pays the first $1,000 and the employee pays the second $1,000, before the $2,000 deductible is satisfied and the insurance plan kicks in. This design offers first dollar coverage, as most have experienced with traditional plan, so it provides an smooth transition to high deductible plans for employees;

C. Split Deductible – In this version, the employer HRA and the employee each pay one-half of claims up to the $2,000 insurance plan deductible, then the insurance takes over. This option offers a compromise of shared initial expenses to give all parties a vested interest;

D. Sandwich Deductible – In this example, the employee might pay the first $500, or an amount equal to any previous plan deductible, second the HRA plan reimburses the next $1,000 expense, then third the employee pays any balance necessary to reach the $2,000 deductible limit for the insurance plan. After that the insurance plan would cover. This is another way to introduce employees to the healthcare responsibilities without a threshold too high;

HSA – HRA Comparison:

Both HSA’s and HRA’s offer excellent approaches to achieve premium cost reductions through high deductible insurance plans in conjunction with tax advantaged programs. With either type, there is room to benefit both employer and employees in the workplace environment. The following compare the two plans on several levels:

Application – An HSA is pertinent to an individual and can be applied in conjunction with personal insurance plans or with employer-sponsored insurance plans, provided the plans are qualified high deductible types. An HRA only applies to employers for use in providing employee benefits. It works best with high deductible plans, but that is not a requirement;

Plan Funding – An HSA can be funded, in whole or in part, by an employer, an employee, an individual or anyone. An HRA must be funded by the employer;

Tax Treatment – HSA contributions are tax-deductible. Employer contributions are not subject to FICA tax. HRA reimbursements are tax deductible for the employer;

Group Size and Eligibility – HSA’s are available to any size group and to individuals. HRA’s are available to any size group, but not to individuals or to employer owners who own more than two percent of shares;

Ownership of Funds – HSA funds are owned and controlled by the individual, regardless of who contributed. HRA funds are owned and controlled by the employer;

Pre-Funding – HSA’s must be pre-funded before withdrawal. HRA’s do not need to be pre-funded, so can be expended as needed;

Plan Flexibility – HSA plan design is subject to specific Federal requirements for associated insurance plan deductibles, out-of-pocket maximums, first dollar benefits, fund contributions and qualified expenses. HSA funds can be placed in a wide variety of investments and expenditures are subject to owner discretion. HRA plans offer much greater flexibility in plan design and cash flow control, based on preferences of employer;

For ideas on Fitness Culture, go to Fitness Culture.

For information on Medical Self Care Prevention, go to Prevention.

For information on Medical Self Care Management, go to Management.

For information on Patient Care, go to Patient Care Plan.

For information on HSA’s, go to Savings Accounts.

For information on High Deductible Health Plans, go to High Deductible Plan Considerations.

WARNING: NEVER CANCEL YOUR CURRENT INSURANCE UNTIL REPLACEMENT COVERAGE IS APPROVED AND IN PLACE.

To get a Fitness Assistance Proposal, go to Fitness Proposal Request.

To get a High Deductible Group Health Plan Quote, go to Group Quote Request.