The Origin of The HRA

When coining the phrase Health Reimbursement Arrangement the IRS indicated that the vehicles presently used to finance medical expenses were passed many years before and were not readily adaptable to the reality of present medical costs. Section 105(h) did not specifically provide for a rollover provision of unused funds and Section 125 had very restrictive rules. HRAs were specifically created with very few rules. Fewer rules allows for more flexible plan designs thus enabling the Employers to implement plans that that adapt to their specific situation.

There are now basically two HRA plan designs as permitted by Section 105(h). The first type is known as the Partially Self-Funded model. The second is known as the Consumer Driven Model. The major difference between the two is who may contribute to the plan. What's really new here is formal guidance from the IRS that allows the Consumer Driven plan design model the option of a carryover of unused amounts to later years.

Plan Design Models

The Partially Self-Funded HRA Model - As medical insurance premiums continue to rise, employers are seeking ways to retain richer benefit levels with alternative methods of funding them. This model has the employer select a level of benefits that is significantly below the present level. The selected plan typically has a high deductible with a greater out of pocket maximum and thus a lower premium. An HRA is then implemented to pay claims underneath the deductible to the maximum selected.

This plan design will typically save overall cost as the total premium saved by going to the lower benefit plan is divided among all employees with relatively few employees reaching the total maximum benefit of the HRA offering. This is in direct contrast to the employer continuing to pay a full benefit premium to an insurance company regardless of overall plan usage.

For example: Assume an employer has a present medical plan with no deductible. The insured is responsible for 20% of qualifying expenses until they have paid $1,000 out of their own pocket.  Instead of continuing the present plan the employer chooses a plan with a $2,000 deductible with 100% thereafter. With the premiums saved, the employer implements a Section 105(h) HRA plan with benefits that pay 50% of expenses applied towards the deductible. The employee is responsible for 50% ($1,000). The employer funds the other 50% ($1,000). With sufficient premium savings the employer will save money because relatively few participants will incur the maximum amount. CAUTION: Some partially self-funded HRAs are more difficult to administer than others. Employers considering implementation of this model should call FlexBank to discuss the problems of administering some plan designs.

The Consumer Driven HRA Model - In combination with a high deductible medical plan, an HRA may be installed to assist in the payment of medical claims applied towards the base plan's annual deductible. In this model, any monies not used are typically rolled forward to subsequent years although this is not a requirement. The concept of this model is to encourage the employee to more effectively purchase medical goods and services thus reserving money to pay more of the deductible in future years. Participants will have to become more active in the consumption of health care to make this arrangement work.

HRAs Must Be Employer Funded

• Must be funded outside of a cafeteria plan.
• To avoid attribution of employee contributions towards a High Deductible Health Care plan (HDHC), the amount of any employee contribution may not exceed the actual cost of the HDHC for the coverage period.
• The terms of premium salary reduction agreement must indicate that the election is used only to pay for the HDHC premium and not the HRA.
• The HRA must not interact with a cafeteria plan in such a manner as to permit employees to use salary reductions to "indirectly" fund the HRA.

HRAs may reimburse for expenses that:

• qualify under Code Section 213(d) such as medical, vision and dental,
• are substantiated, and
• may be for current and former employees (including retirees), the spouse and dependents of former employees and COBRA qualified beneficiaries.

HRAs may not reimburse for expenses that:

• were attributable to deductions allowed under Code Section 213 for a prior plan year,
• were incurred before the HRA was in existence,
• were incurred before the employees date of enrollment in the HRA, and
   

In order to have a valid 105(h) HRA Plan, the IRS says you must have:

• a written plan; and
• a Summary Plan Description