What is an HRA?

An Health Reimbursement Arrangement, or HRA, is an employer-funded arrangement that reimburses employees for certain medical expenses determined by the employer. These expenses include, but are not limited to co-pays, coinsurance and deductibles incurred by employees, and if the employer so chooses, their spouses and dependents. Specifically excluded from HRA reimbursement is individual/private premium for health insurance, but if you are a small employer, under 50 FTE, you may qualify for what is called a QSEHRA.

When combined with a higher deductible insurance plan, HRAs can help lower insurance premiums for the employer because of the increased deductible. Employees are not paying for this increased deductible because HRA funds/reimbursements typically match the saving generated from the redesigning the over medical plan.

In implementing an HRA, employers create an account for each participating employee and reimburse the employee for medical expenses incurred up to maximum reimbursement amount set forth by the employer. An HRA must be paid for solely by the employer and may not be funded through employee salary reductions. It is at the employer's discretion to roll over unused funds in an employee's account to subsequent coverage periods.

There is no specific code section governing HRAs, but the IRS has confirmed their tax-favored treatment under the general principles of Code 105 and 106. However, IRS Notice 2002-45 does govern the HRA and defines it as "an arrangement that:

  1. 1. Is funded solely by the employer and not provided pursuant to salary reduction election under a Section 125 cafeteria plan;
  2. 2. Reimburses the employee for medical care expenses (as defined by Section 213(d) of the Internal Revenue Code) incurred by the employee and, if permitted by the employer, the employee's spouse and dependents (as defined in Section 152); and
  3. 3. Provides reimbursements up to a maximum dollar amount determined by the employer for a coverage period at the election of the employer. Any unused portion of the maximum dollar amount for a coverage period may or may not be carried forward to increase the maximum reimbursement amount in subsequent coverage periods."

The Benefits of an HRA

If an HRA is operated in compliance with IRS guidance, employees will not be taxed on the value of their HRA coverage or on reimbursements that they receive from the HRA. The money placed in the HRA is not subject to FICA contributions by either the employer or employee. Additionally, money in the plan is never subject to Federal or State Income Tax as long as it is used exclusively to reimburse the employee and/or their dependents for eligible healthcare expenses as determined by the employer.

Financial Value

Premium Decrease: Employers can experience a 0% renewal or even a decrease in medical plan premium by moving to a benefit plan with higher deductible and/or out-of-pocket costs, while at the same time providing insulation for employees from those higher health costs because the HRA is designed to pay it for them. HRA plans have 100% employee acceptance because it is 100% employer paid.

Contribution Amounts: Amount of individual and family HRA funding is at the employer's discretion.

Rollover Amounts: The employer has potential to keep unused funds at the end of the plan year or allow funds to roll over from year to year.

HRA Plan Designs

We, at alt Bentley Yates, have the ability to tailor an HRA plan to fit the unique needs and requirements for any employer group. Common HRA plan designs include:

  1. Employee Only
        a. One HRA account for only the employee’s deductible or RX or co-insurance expenses
  2. Employee Plus One
    1. Two separate HRA account; one for employee and one for dependent’s dental or vision expenses
  3. Employee Plus Family
    1. Three separate HRA funds; one for employee, one for spouse and one for ALL other dependents for deductible, X-ray or orthodontics
    2. Separate HRA funds; one for employee, one for spouse and one for EACH dependent’ (max 3, in most cases) RX, deductible, co-insurance, lab, out-of-pocket expenses

The flexibility of the alt Bentley Yates powered HRA plan can best be illustrated by a few simple drawings.

GMP Deductible GMP Plan

This GMP deductible can be funded partly by the employee via the so-called HRA deductible and partly by the employer through an HRA plan:

HRA Deductible HRA Plan funding GMP Plan

The HRA can again be flexible by defining a split in funding between the employer and the employee for example 50/50 or 20/80:

HRA Deductible HRA Plan funding GMP Plan
Employee funding

Finally, the alt Bentley Yates HRA can be made even more sophisticated by the facility to 'slide' the HRA within the GMP deductible, i.e. defining an amount of the GMP deductible to be fully funded by the employee after the HRA has been exhausted:

HRA Deductible HRA Plan funding Employee
Funding

GMP Plan
Employee funding

Key:

 

Employee Paid

 

HRA Paid

 

Paid by the Insurance Company

** These examples show the correlation of an HRA and its corresponding deductible, remember that co-pays, coinsurance, and other items specifically listed in your plan documents can also be reimbursed through the HRA.

The alt Bentley Yates experts will work with you to find the optimum combination of benefits for your company's HRA.

A Closer Look at the HRA Features

The alt Bentley Yates powered HRA helps companies control healthcare related expenses by:

  • HRAs are funded with employer dollars, not employee salary reductions, so HRAs have 100% employee acceptance.
  • The "use-it-or-lose-it" rule is allowed but not required; employees can accumulate unspent money and may carry funds over to the next year; it is the choice of the employer.
  • The HRA can pay first or after the employee has paid a specified amount, set by the employer, toward their deductible.
  • Available on any medical plan, but produces best results when paired with a higher-deductible plan.
  • HRAs can be combined with other employee benefits within a Cafeteria-style Flexible Benefit Plan.
  • HRAs can include or exclude vision and dental benefits as the company sees fit.
  • HRAs can include or exclude the employee's family members as the company sees fit.
  • Individual and family HRA contribution amounts to be set independently.
  • HRAs permit the employer to reduce health insurance premium costs by combining the HRA with a high-deductible lower-cost health plan.

HRAs and COBRA

An HRA is a group health plan and is therefore subject to COBRA Continuation requirements. A participant electing COBRA coverage must be eligible to receive the maximum amount of reimbursement under the HRA that was available at the time of the COBRA qualifying event should they elect COBRA for the HRA. The amount available must be increased at the same time and in the amount as any increase for similarly situated non-COBRA beneficiaries at plan renewal or other plan changes; however, there is an HRA COBRA premium created and charged to COBRA participants.

alt Bentley Yates will assist in determining the HRA COBRA premium, which can be determined in multiple ways. To learn more about HRA COBRA premiums, please contact us!

Coordination with Flexible Spending Accounts (FSAs)

An employer may offer both an FSA and an HRA, but expenses cannot be reimbursed under both the HRA and the FSA. In the plan documents, employers specify which account will reimburse first; typically, the HRA pays first and the FSA second, but it is at the discretion of the employer. This is referred to as the "Benefit Order". FSAs and HRAs can also be structured so that specific types of items can only be reimbursed from one or the other, for example, permitting the FSA to cover only vision expenses and permitting the HRA to cover all other forms of medical expense

Coordination with Health Savings Accounts (HSAs)

An employer may offer both an HSA and an HRA, but there are certain plan design requirements that must be followed in order for the plan to maintain HSA eligibility. HSA plans have minimum employee medical out of pocket rules in order to be considered HSA eligible and as long as the HRA plan design is structured to meet those requirements the HRA and HSA combination is fully compliant.

For 2018 the minimum deductible:

  • Minimum deductibles are $1,350.00 for employee only and $2,700.00 for family coverage

For 2019 the minimum deductible:

  • Minimum deductibles are $1,350.00 for employee only and $2,700.00 for family coverage