Health Reimbursement Account

Health Reimbursement Account is a notional derivative of a Health Reimbursement Arrangement (HRA),^[1] a type of US employer-funded health benefit plan that reimburses employees for out-of-pocket medical expenses. Following implementation of the Affordable Care Act these health plans must be integrated with a qualified employer-sponsored group health insurance plan to avoid excise tax penalties.^[2] Using a Health Reimbursement Arrangement yields "tax advantages to offset health care costs" for both employees as well as employers.^[3]

Establishment

Health Reimbursement Accounts are funded solely by the employer, and cannot be funded through employee salary deductions. The employer sets the parameters for the Health Reimbursement Accounts, and unused dollars remain with the employer - they do not follow the employee to new employment.

Contributions

Health Reimbursement Accounts are notional accounts; no funds are expensed until reimbursements are paid. Through health reimbursement arrangements, employers reimburse employees directly only after the employees incur approved medical expenses. According to the IRS, an HRA "must be funded solely by an employer," and contributions cannot be paid through a salary reduction agreement (i.e., a cafeteria plan).^[4] There is no minimum or maximum contribution limit on the employer's contributions to an HRA.^[3]

Distributions

According to the IRS, employees are reimbursed tax-free for qualified medical expenses up to a maximum dollar amount for a coverage period. HRAs reimburse only those items (co-pays, coinsurance, deductibles, and services) agreed to by the employer which are not covered by the employer's selected standard insurance plan (any health insurance plan, not only high-deductible plans). These arrangements are described in IRC Section 105.

With an HRA, employers fund individual reimbursement accounts for their employees and define what those funds can be used for – specified out-of-pocket expenses such as deductibles and co-pays.

Qualified claims must be described in the HRA plan document at inception, i.e., before reimbursing employees for those medical expenses. Arrangements (medical services, dental services, co-pays, coinsurance, deductibles, participation) may vary from plan to plan, and an employer may have multiple plans in place, allowing much flexibility. The kinds of expenses that can be paid under an HRA are generally the same as the expenses that can be paid through a Flexible Spending Account (FSA).^[5]

The employer is not required to prepay into a fund for reimbursements. Instead the employer reimburses employee claims as they occur.

Reimbursements under an HRA can be made to the following persons:

1. Current and former employees.
2. Spouses and dependents of those employees.
3. Any person the employee could have claimed as a dependent on the employee's return except that:
   1. The person filed a joint return,
   2. The person had gross income of $3,400 or more, or
   3. The employee, or his/her spouse if filing jointly, could be claimed as a dependent on someone else's tax return.
4. Spouses and dependents of deceased employees.

Advantages, disadvantages, and limitations

Advantages of HRAs for employers include:

• Reimbursements of qualified claims are tax-deductible for the employer.
• Employers know their maximum expense related to their health care benefit.

Advantages of HRAs for employees include:

• Contributions that employers make can be excluded from employees' gross income (contributions must be made by the employer, not come from payroll reductions).
• Reimbursements may be tax free if the employee pays qualified medical expenses.
• Unused funds in the HRA can be rolled into future years for reimbursement.
• HRAs may be offered in conjunction with other employer-provided health benefits, including Flexible Spending Accounts (FSAs).
• Employees can be reimbursed for a health care plan that meets their or their families' specific needs, as opposed to a standard company plan.

A frequent complaint regarding HRA arrangements is that they are extremely opaque in regards to their requirements. HRAs must follow "a variety of statutory rules and provisions" including the COBRA continuation coverage requirements, ERISA, and HIPAA.^[6]

HRA plans are considered "Primary Payers" subject to Medicare Secondary Payer (MSP) mandatory reporting requirements. There are significant penalties for failure to comply with the MSP reporting requirements. Although the MSP reporting requirements began to apply to certain group health plans on January 1, 2009, CMS has delayed mandatory reporting for HRAs.^[7]

Rules pertaining to their reimbursements are perceived by member participants to be somewhat contradictory and/or even incoherent- leading some to lose contributions which are intended for healthcare but are learned (after the procedure or laboratory test) to be disallowed.

Limitations of HRAs include:

• Self-employed persons are ineligible (except as explained below).
• "Highly compensated" participants may be subject to "certain limitations."

That a self-employed person may not take advantage of an HRA is essentially correct. However, a sole proprietor can employ their spouse and as long as their employable interest, the spouse, does in fact help with the business. Then the employer would need to establish a W-2 to make the spouse's employment legitimate. Thus the health care can be run through the business and will save the family, on average, $3,000 each year. As small businesses look to reduce costs, especially medical, the HRA be can a great tool that has been utilized by all too few since the 1954 tax law. HRAs are treated as group health plans and subject to the medicare secondary payment (msp) provisions. HRAs are subject to the msp provisions regardless of whether or not they have the end-of-year carry-over feature.

Standalone HRAs that are not offered in conjunction with a High Deductible Health Plan are subjected to restrictions starting in 2014.^[8] The Health Care Reform law essentially bans the existence of these type HRAs as a health plan with maximum benefit limit.

References