Health Reimbursement Account

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Health Reimbursement Accounts or Health Reimbursement Arrangements (HRAs) are Internal Revenue Service (IRS)-sanctioned programs that allow an employer to reimburse medical expenses paid by participating employees, thus yielding "tax advantages to offset health care costs"^[1].

Description

Establishment

HRAs are initiated by the employer and serviced by a third-party administrator or plan service provider. The employer may provide in the HRA plan document that a credit balance in an employee's HRA account can be rolled over from year to year like a savings account. The employer decides if the funds are rolled from year to year and how much rolls over (which can be either a flat amount or a percentage.

Contributions

According to the IRS, an HRA "must be funded solely by an employer," and contributions cannot be paid through a voluntary salary reduction agreement (i.e., a cafeteria plan)^[1]. There is no limit on the employer's contributions, which are excluded from an employee's income^[1].

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 (copays, coinsurance, deductibles and services) agreed to by the employer which are not covered by the company's selected standard insurance plan (any health insurance plan, not only high-deductible plans). These arrangements are described in IRS Section 105.

With an HRA, employers fund individual reimbursement accounts for their employees and define what those funds can be used for – i.e., 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 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 2007 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.
• 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 do not have to be covered under any other health care plan to participate, unlike (for example) a Health Savings Account (HSA) which requires a High Deductible Health Plan.
• 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, the (ERISA), and the (HIPAA).

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.^[2]

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.
• "Highly compensated" participants may be subject to "certain limitations."

References

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; i.e. 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 the average, of $3,000 each and every year. As small businesses look to reduce costs, especially those tied to medical, this is a great tool that has been utilized by all too few since the tax law in 1954.