The ever-rising cost of healthcare is a major concern for most employers.
the IRS recently defined the rules for the establishment of Health Reimbursement
Arrangements (HRAs). Usually coupled with a high deductible healthcare plan, an HRA allows employers the ability to enhance their employee benefit package while still achieving their goals of lowering health insurance costs or maintaining costs at current levels.
To learn more about HRAs, read our article in
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1. What is a Health Reimbursement Arrangements (HRA)?
HRAs, also referred to as consumer-driven healthcare plans, are employer-funded accounts used to reimburse medical expenses to employees. Similar to a Section 125 Healthcare Flexible Spending Account (FSA), HRAs reimburse medical expenses defined in IRC Section 213 (d) as “medically necessary” including co-pays, deductibles, office visits, vision care expenses, prescriptions, dental expenses and health premiums under COBRA. However, unlike Healthcare FSAs, the “use-it-or-lose-it” rule does not apply to the HRA, allowing unused funds to be carried forward (contingent upon the employer’s plan design). These employer-provided funds are untaxed at the employee level and tax deductible at the corporate level.
2. What about satisfying the Davis Bacon Act, Service Contract Act or
State Prevailing Wage Laws?
Employers that perform services for public entities can fund, on an hourly basis, their HRAs into a welfare benefit trust and receive “credit” under the applicable law. These employers can provide an HRA, exclusively for their hourly employees, utilizing the hourly fringe benefit rate to fund the HRA. Because of Department of Labor (D.O.L) compliance, a welfare benefit trust would be established that the employer would fund on behalf of each employee. Since the D.O.L. does not allow the employer to recapture the contribution, any unused benefit would carry forward to the next plan year.
3. How does an employer establish a Healthcare Reimbursement Plan?
With an HRA, employers have a variety of plan design options available. Before a plan can be implemented, the employer must decide upon the following features: roll-over options, coordination with their FSA account, and determination of funding limits for each employee classification. Once the plan is created and adopted, the employer must distribute a Summary Plan Description (SPD) to all eligible employees.
4. What Plan Design options are available?
Plan design options are flexible. HRAs may be designed to roll unused balances forward from one year to the next, or to forfeit to the employer at the end of the coverage period. Unlike a Healthcare FSA, the HRA plan does not require employers to advance claim payments to employees prior to the funding of their account. The employer can design the plan so that the funds must have been contributed before they are available to pay for eligible expenses. Following are some typical plan design options:
- First Dollar or Bridge: The First Dollar HRA complements a higher-deductible
insurance plan. It pays only for deductible items covered by insurance
and provides a bridge between out-of-pocket expenses and insurance
- Comprehensive: A comprehensive HRA pays all medical expenses
not covered by insurance. These expenses include, but are not limited
to: dental and vision expenses, chiropractic services, co-pays, deductibles,
and insurance premiums. This plan could be coupled with a high-deductible
or limited-coverage insurance arrangement or as a stand-alone employee
- Restricted: A restricted HRA covers a specific group of expenses such as dental or vision. It can also be limited to a single medical expense like prescriptions or insurance premiums.
5. How does the HRA coordinate with Flexible Spending Accounts?
An employer may offer both an FSA and an HRA. The same expense cannot, however, be reimbursed from both accounts. Special ordering rules can be designed to determine which account the reimbursement should be made from first. Alternatively, FSAs and HRAs can be structured to provide for reimbursement of mutually exclusive types of medical expenses (such as permitting the FSA to cover only vision expenses and permitting the HRA to cover all other forms of medical expense).
6. What are some advantages of an HRA Plan?
- Combining a higher deductible
insurance plan with an HRA plan can lower a company’s
health insurance costs.
- An HRA plan can help lower prescription drug
- Administrative costs are tax deductible and can be paid by
the employer or employees.
- Unused employee account balances can be rolled
forward each year or forfeited by employees, depending on the benefits
- An HRA complements an FSA plan and enhances FSA participation levels.
FSAs - Flexible Spending Accounts
1. What is a Flexible Spending Account (FSA)?
An FSA is an IRS-approved, tax-exempt benefit offered by some employers, which allows employees to use before-tax dollars to pay for miscellaneous expenses not typically covered under an employers current health plan, such as dependent care, certain medical and dental services. Generally, employees will specify the amount they would like deducted on a before-tax basis for each type of account. These amounts will be automatically deducted each month on a before-tax basis and deposited into their Flexible Spending Account. Employees can then submit their expenses for reimbursement from their account.
2. What are the Employer Benefits?
When employees purchase benefits on a pre-tax basis, their compensation decreases when calculating employer payroll taxes and, in some instances, insurance premiums. Employers can realize direct bottom-line savings in the form of reduced employer F.I.C.A. (social security) taxes, F.U.T.A. (federal unemployment) taxes, disability and worker’s compensation insurance premiums (varies state by state). The total savings at the employer level can potentially represent as much as 10%, and will most likely pay for administration costs associated with these plans.
3. What are the Employee Benefits?
Employees have a high appreciation for these plans because of the flexibility they offer, resulting in a large return in employee satisfaction. Potential savings may range from 20% to 35% on each pre-tax dollar, depending on their present tax bracket, and, in most states, employees can save their State Income Tax as well. Each employee is given the choice of which pre-tax benefits will best meet his or her individual and financial needs. This choice affords employees the ability to customize their personal benefit program based on their individual needs and that of their family.
4. What are some of the Eligible Expenses?
- Ambulance service
- Birth control pills
- Chiropractic care
- Contact lenses (corrective)
- Dental fees (non-cosmetic)
- Diagnostic tests-health screening
- Doctors' fees
- Drug addiction/alcoholism treatment
- Most prescription drugs
- Experimental medical treatment
- Guide dogs
- Hearing aids & exams
- Injections and Vaccinations
- Optometrist fees
- Orthodontic treatment
- Most Over-the-Counter (OTC) medicine and drugs
- Prescription drugs to alleviate nicotine withdrawal symptoms
- Reconstructive surgery after mastectomy
- Smoking cessation programs/treatments
- Surgery Transportation for local medical care
5. Does Dependent Care fall under an FSA?
Yes. Employees can use this account to pay for eligible dependent care expenses with pre-tax dollars up to $5,000 per family per year. This option is a replacement for the federal childcare tax credit. Each plan year employees elect the amount they will use pre-tax for dependent care expenses to be deducted in equal increments from their paycheck. The monies are held in a separate account for each employee until the employee submits an eligible dependent care expense claim. Unlike the healthcare account, only the amount that has been deducted to date can be reimbursed to participants. This eliminates any risk on the employer's part since the account can never have a negative balance.
- Before and after-school programs
- Nursery or pre-school tuition
- Summer day camp
- Care in a home by a licensed provider
Who is an Eligible Dependent?
- A child under the age of 13
- A spouse, parent or child(ren) of any age who are physically or mentally unable to care for themselves AND who qualify as a dependent on your federal tax return