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| Posted on: Tuesday, November 18, 2003 |
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Background
IRS Ruling 2002-41 and Notice 2002-45 outlined rules under which Defined Contribution Medical Plans could operate much like Medical Saving Accounts (MSAs), an option Congress passed many years ago. However, use of MSAs was limited only to smaller employers. HRA’s are available for use by all employers, and will be a useful tool for employers in the quest to design and operate attractive and affordable Medical/Dental/Vision Benefit Plans.
HRA’s will either be ’stand alone’ additions to current Plans, or more likely implemented coincident with significant increases in copays and deductibles in traditional Medical Plans. In addition, HRAs can be used to totally replace conventional Dental and Vision Plans.
Why Consider HRA’s?
If used properly, HRA’s have the potential to slow down the increases in healthcare costs that employers are experiencing in current Benefit Plans. To do so, HRAs employ a time-tested technique known as ’self interest.’ Simply, employees are given significant control over the expenditure of $X when buying health care. They can use the money wisely and obtain good value for the purchases they make or they can spend it unwisely. In other words, the employee decides what to purchase and bears the consequences of those decisions. The new mantra should be ’Save it, don’t waste it.’
Some would suggest that employees are not up to the task of evaluating complex medical issues, negotiating with physicians and dentists, and making sound HRA expenditure decisions. Others argue persuasively that, while imperfect, to ’let the patients decide and bear the consequences of their decisions’ is the only rational option that has a chance of reducing waste found in the current healthcare system.
Rules Affecting Health Reimbursement Accounts (HRA’s)
1. HRA contributions must be paid solely by the employer.
2. A participant can carry over unused amounts in the HRA from Plan Year to Plan Year.
3. Amount payable could be limited to ’YTD’ HRA accrual.
4. Plan can limit coverage to expenses incurred in a plan year and paid in a plan year, plus ’x’ months.
5. With some exceptions, medical expenses incurred outside the period of coverage may be reimbursed; i.e. an unreimbursed claim may be reimbursed in a later coverage period only if the individual was covered under the HRA when the claim was incurred.
6. The maximum amount credited under the HRA (not including what’s carried forward) may be increased or decreased by the Employer.
7. Participants cannot be offered the option to receive cash or any other taxable or non–taxable benefit (i.e. no cash-out or severance payout of unused amounts when coverage stops).
8. Employer contributions to an HRA may not be attributable to salary reduction; salary reduction may not exceed the actual cost of the health plan coverage. (Calculate cost of health plan coverage by determining the COBRA applicable premium). There also cannot be a correlation between the cost of the health plan salary reductions and the HRA.
9. A Plan sponsor cannot allow an employee the choice to elect salary reduction to pay the premium of the health plan OR use the amounts in the HRA reimbursement arrangement to pay for the premium of the health plan. The choice to use it in lieu of electing a salary reduction makes this an indirect funding of the HRA and thus subject to the rules under §125.
10. Reimbursements are limited to employees and spouse/dependants for Medical/Dental/
Vision expenses (Code Sect. 213).
11. Benefit payments are excludable from employees’ gross income.
12. An HRA is a group health plan generally subject to the COBRA continuation coverage requirements.
13. If a Flexible Spending Account (FSA) is offered as well, the Plan Sponsor has the authority to determine which (FSA or HRA) shall reimburse eligible expenses first (until exhaustion), and which shall reimburse last if it is clearly stated in the Plan Document. If the HRA Plan is silent as to the order of reimbursement, the FSA must pay last.
Should you have any additional employee benefit questions or would like to discuss this material in detail, please don’t hesitate to call the Denman Team.
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