Health Reimbursement Arrangements (HRAs) – HSA’s 1st Cousin

 

Last week’s post provided an overview of Health Savings Accounts or HSAs.  This week’s post is meant to provide an in depth understanding of the HSA’s 1st cousin – the Health Reimbursement Arrangement or HRA.

In June of 2002 the IRS issued an important revenue ruling which created the HRA (through a tweaking of existing IRC section 105).  The ruling created tremendous flexibility for the use of employer funded dollars set aside to pay for specific health care items.  As this week’s blog title suggests, HRAs are similar to HSA’s, but are actually much more similar to Flexible Spending Accounts (FSAs).  However, HRAs have distinct advantages for both employer and employee, over FSAs and HSAs.

So exactly what is an HRA?  HRAs are defined as accounts that:
· Reimburse participants for medical expense
· Are financed exclusively by the employer
·  Reimburse for medical expenses up to a maximum dollar amount in a plan year
·   Allow unused dollars to be carried forward to the next plan year (unlike FSAs)
And since HRAs qualify as health plans, coverage and benefits are tax-free!
Like it’s close cousins – HSAs and FSAs, HRAs are tax preferred funding arrangements, usually established in conjunction with a high deductible, GROUP health insurance plan. (IMPORTANT: Unlike HSA’s, HRA’s are not required to accompany a qualified health plan. However, beginning 1/1/14, they must accompany a GROUP (individual plans are not allowed) health insurance plan, unless the HRA is for retirees only.) Such a plan acts like a “safety net”, and provides insurance protection for the higher cost, unanticipated medical expenses (much like health insurance used to do in the “old” days before copays, drug cards, and first dollar benefits).   Premium savings is usually realized by implementing the higher out of pocket plan, in place of the more traditional, benefit-laden plans that have low copays, deductibles, and coinsurance.  With an HRA type plan, the lower cost, more predictable items are paid for with the funds in the account, while the higher cost, unanticipated expenses are covered by the accompanying group health plan.
There are important features of the HRA that need to be taken into consideration, primarily the “do’s and don’ts” of what the HRA funds can be used for.  Generally speaking, HRA funds can be used by an employee to pay for any medically related expense listed on the Internal Revenue Services section 213(d).  This listing includes a broad range of expenses from acupuncture to vitamins.  Additionally, HRA funds can be accessed to pay for Long Term Care insurance, and to pay for health insurance coverage on behalf of retirees and former employees electing COBRA continuation coverage.  HRA funds cannot be used for benefits other than medical expense reimbursement nor can they be used to pay for expenses for which a tax deduction was, or is to be taken.  Finally, in order to use HRA funds to pay for a qualified expense, the expense must have been incurred during the time that the HRA was in place. (Note: HRA plans have their own Summary Plan Description (SPD), which outlines, among other things, specifically what expenses are reimbursable.)
The following chart lists the primary differences between HSAs and HRAs:
HSA
HRA
Who Funds It?
EE and/or Emp
Employer Only
Carry Forward Unused $
Yes
Yes or No*
QHDHP Required?
Yes
No
Who Owns It?
Employee
Employer
Interest accrual
Yes
No
Personal Account
Yes
No
Use funds for non-medical
Yes
No
Is it Portable?
Yes
Yes or No*
Funding mechanism
Bank Account
Wage allocation
            *Employer decides
Recently, the IRS and the Department of Labor released guidance affecting HRA’s for plan years beginning in 2014, in light of the Affordable Care Act (ACA).  Here are the main points of this guidance:
·      The HRA must be offered only to plan participants who are actually enrolled in other grouphealth plan coverage. Pairing the HRA with individual insurance coverage violates the annual dollar limit prohibition and the preventive services requirement. (Note: an exception to this requirement would be a retiree HRA plan, which does NOT have to be paired with a group health plan.)
·    The group coverage must comply with the annual dollar limit prohibition and, if non-grandfathered, the preventive services requirements.
·      The other group health plan does not have to have the same plan sponsor, the same plan document or the same Form 5500 filing as the HRA. For example, the HRA could be made available to plan participants who enroll in the group health plan offered by a spouse’s employer.
·      If the other group health plan with which the HRA is paired does not meet the Affordable Care’s Act’s 60 percent minimum value standard, there will be limits on the types of expenses the HRA may reimburse. In that circumstance, the HRA may only reimburse for copayments, coinsurance, deductibles, expenses that are not essential health benefits, and premiums for the purchase of the other group health plan.
·      An active or former participant must be allowed to (annually) permanently opt out of HRA coverage and waive future reimbursements from the HRA. Upon termination of employment, a participant must be able to permanently opt out of and waive future reimbursements from the HRA, or if this option is not made available, the remaining amounts in the participant’s HRA must be forfeited. The reason for the opt-out is to give the participant the choice of spending down the HRA balance (in accordance with the terms of the plan) or applying for a premium assistance tax credit in a health insurance Marketplace. Retaining any balance in the HRA would prevent the participant from getting the tax credit.
·      If not waived, unused HRA amounts that are credited to a permissible HRA may be used to reimburse qualified medical expenses after the participant ceases to be covered by the other group health plan coverage (for example, when the participant retires).

 

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