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Design Your Own Health Plan with an HRA

What healthcare plan allows employers to set their own maximum for employee healthcare costs, can be structured to cover 100 percent of preventive care for most employees, and gives employees greater incentive to manage their healthcare costs? 

The answer? Health Reimbursement Arrangements, or HRAs. As one of the most flexible healthcare benefits, it’s no surprise that many employers offer HRAs. 

HRAs offer tax advantages for both employees and employers. HRAs do not involve insurance—rather, the employer agrees to reimburse eligible employees up to a certain amount each year for qualified healthcare expenses for themselves. HRAs can also cover spouses and eligible dependents, if the employer wishes. 

To meet the definition of a qualified HRA, the IRS requires them to (1) be funded solely by the employer and not by salary reduction, and (2) provide benefits only for substantiated medical expenses. In other words, the HRA can only reimburse employees when they provide proof of eligible medical expenses. (3) Only employees or former employees and their spouses and dependents can participate; owners cannot (including owners of partnerships, LLCs, LLPs and S-corporations).  

HRAs Offer Flexibility 

Employers can tailor HRAs to their needs and those of employees. HRAs can work with other benefits, such as high-deductible health plans (HDHPs) and flexible spending accounts (FSAs). For example, by combining an HRA with a high-deductible health plan, you can provide low-cost health benefits for your employees that will cover 100 percent of preventive care expenses for most employees, such as routine physicals and child immunizations.

HRAs give employers more flexibility in funding and plan design than health savings accounts (HSAs). While HSAs are funded accounts, the employer does not need to set aside funds at the beginning of the year for an HRA. Instead, you can pay reimbursements out of cash flow as need arises. Further, you can allow employees to roll HRA balances over from year to year, if you choose, as well as allowing retirees to participate. 

As reimbursement plans, HRAs work better than many other health plans to raise employees’ awareness of the real costs of healthcare, while giving them greater decision-making control over their healthcare spending. 

Advantages of HRAs for Employers: 

  • You choose how much to set aside per employee each year, and what types of qualified expenses the HRA will cover, whether preventive care, out-of-pocket expenses, dependent costs or health insurance premiums. 
  • You can deduct reimbursements of qualified claims as a business expense. 
  • You know at the beginning of the year the maximum amount your employee healthcare benefits will cost.
  • You can offer HRAs with other benefits, including flexible spending accounts. 
  • You will have minimal paperwork and administrative burdens, compared to the costs of self-insuring.

Advantages of HRAs for Employees

  • They can exclude reimbursements from gross income. 
  • They may be able to accumulate unused funds for use in future years, depending on plan structure. 
  • They do not have to be covered under any other health care plan to participate, unlike a health savings account (HSA), which requires a high-deductible health plan (HDHP). 
  • They can use funds to be reimbursed for premium payments for a healthcare plan that meets their or their families’ specific needs, as opposed to a standard company plan. 
  • Instead of designing a health plan for a few high-end users, you can design an HRA for the 80 percent of most companies’ employees who are low-end healthcare users. To discuss the uses of HRAs in benefit design, please contact us.    

HRA Rules to Remember 

  • Only employer dollars can be used to fund an HRA, not including funds that are considered employer dollars as a result of an election under a Section 125 plan. Funds may roll over from year to year. 
  • The HRA may not be tied to any salary reduction or deferred compensation program, although an accompanying insurance plan may be tied to a salary reduction plan. But the salary reduction may not exceed the actual cost of the insurance plan and may not be pegged to any level of HRA contribution. 
  • The employer sets parameters for the type of healthcare expenses the fund will reimburse. Reimbursements may include items allowed under IRS Section 213(d), or simply expenses not covered by the high-deductible health plan, such as deductibles, coinsurance, co-pays and other cost sharing. HRAs can also reimburse employees for health insurance premiums, such as medical plans, long-term care insurance, dental insurance and dependent coverage. Disability policies do not qualify. 
  • HRAs must be available for COBRA continuation on the same basis as other health plans. 
  • Employers can elect whether to make HRAs available to terminating or retired employees.  
  • Unused HRA funds remain with the employer when an employee terminates. Employers may not bonus terminating employees an amount equivalent to the dollars that remain in their HRA. 
  • HRAs can coexist with flexible spending accounts (FSAs) and cafeteria plans as allowed under Section 125. The notice requires that the HRA be exhausted before the FSA pays. However, an employer may set up the HRA plan document to require FSA exhaustion first.
  • Many of the timing rules of an FSA do not apply to an HRA, so a mid-year enrollment is allowed, as well as reimbursements that cross calendar years or plan years.  
  • The same non-discrimination rules that apply to other health benefit programs apply to HRAs.