By Renee Hotte
Yes, yet another acronym to remember. Employers hoping to curb the skyrocketing costs of health insurance by putting a speed bump in the road to medical spending now have a useful mechanism at their disposal: the health reimbursement arrangement, or HRA.
What is an HRA? Similar to an IRA, for individual retirement savings, an HRA is an individual account for health care. The employer contributes all funds to the account, but the employee controls how it’s used. It is consumer-managed care as opposed to administrator-managed care. It gives your employees the authority to make decisions on their own medical spending habits. The HRA shifts cost and risk to the employee. HRAs are accounts funded solely by the employer to reimburse medical expenses and not funded by salary reduction or otherwise under a cafeteria plan. The employee, his or her spouse, and their dependents may incur these medical expenses on their own. HRAs are similar to Flexible Spending Accounts (FSAs) except they allow unused contributions to be automatically rolled over into the next year.
As a result of the dramatically high cost of health insurance, employers have shifted the cost to employees by way of higher co-pays, deductibles and higher payroll deductions. Employees and employers alike have seen their costs double in the last five years and the benefits lessen.
The purpose of the HRA is to provide first dollar coverage for employees and their dependents while providing a stopgap to the inflationary cost trend. To make this work, employers buy higher deductible health insurance, thus lowering their cost. From the premium savings, the employer sets aside HRA accounts for first dollar coverage.
Instead of designing a health plan for a few high-end users, the HRA design is for the 80 percent of most companies’ employees who are low-end users. Most employees have doctor’s office visits and prescriptions; however, they rarely meet their deductibles. HRAs allow for a perception change in benefits. HRAs can be designed to provide 100 percent coverage for up to 80 percent of employees year to year.
HRAs are usually limited to supplementing only an employer’s health plan. As employers gain experience, they can expand the HRA program to include dental and vision expenses as well.
The HRA is an unfunded medical account, which means that an employer only has to put money into the account as claims occur. Obviously, if the employee does not use all the account value, the employer does not spend the money. The employer may use a regular business checking account and fund a portion of the account to cover checks or simply use a zero balance sweep account.
Since this is an unfunded account, it is subject to ERISA (Employee Retirement Income Security Act. This means that for the plan to be legal, it must have specific plan documentation and provide summary plan descriptions to employees. Special non-discrimination rules apply and if there are 100 or more participants, a tax form number 5500 must be filed. You must make sure all your group benefits are properly providing updated summary plan descriptions, or SPDs. Without the new updated SPD the employer will lose valuable protections under the law. The filing deadline this year is Dec. 31. Also, the HRA plan document can specify which benefit is available first, the HRA or the FSA.
HRAs are subject to COBRA continuation coverage requirements. An HRA will comply with these requirements for an individual who elects COBRA continuation coverage by continuing the maximum reimbursement amount for an individual at the time of the qualifying event and increasing it at the same time, and by the same amount, that it is increased for similarly situated non-COBRA beneficiaries.
Several issues remain unresolved, and should be researched carefully by your company before you proceed with instituting the HRA plan. These include the application of the Health Insurance Portability Accountability Act (HIPAA) nondiscrimination requirements, including the extent to which underwritten individual health policies purchased and reimbursed by an HRA are treated as group health plan coverage; other HIPAA requirements, including the requirement that a group health plan provide certificates of creditable coverage; ERISA’s requirements for welfare benefit plans; and the deduction limitations for employer contributions to welfare benefit funds and for amounts paid or accrued under plans providing the deferred benefits that are not provided through a welfare benefit fund.
HRAs have several advantages with major significance:
- HRAs are not subject to the “use it or lose it” rule, so carry-over to the next year is allowable;
- HRA accounts may be credited with earnings;
- HRA assets may be used for health insurance premiums;
- HRAs may pay for post-retirement health claims and even for dependents;
- HRAs are defined contribution health care plans, not defined benefit plans;
- HRAs are funded with employer dollars, not employee salary reductions, so HRAs have greater employee acceptance;
- HRAs permit the employer to reduce health plan costs by coupling the HRA with a high-deductible (and usually lower-cost) health plan; and
- HRAs level the playing field between the group purchasing power of larger employers and smaller employers.
No one knows for sure how employers will make use of HRAs. They may, for example, become a favored method for providing retiree health insurance. HRAs will promote employee ownership and health care savings in a way that will fundamentally change health care in America. Giving people the ability to control their own health care decisions, rather than have an HMO or government bureaucrats controlling these decisions, will provide families with access to the quality care they need at a price they can afford.
Does all this sound too good to be true? When employers can lower their rates and get the quality of care that larger groups usually provide, and enable the employee to accumulate money for future health care needs – such as retirement health care expenses and even for dependents’ claims after the employee dies – HRA becomes a win-win for you and your employees. But with all these new issues to consider, including legal questions that are still in flux, it is prudent to obtain the help of a qualified health plan administrator before proceeding.
This column is for general information only. It is not intended to be legal advice and should not be relied upon as legal advice. Renee Hotte was the FMLA Manager of BASIC. For more information about BASIC products and services, call 800-444-1922.
[From Connection Magazine – November 2002]