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On June 26, 2002, the U.S. Treasury Department released its revenue ruling allowing HRAs. Employers may use HRA plans to fund accounts on behalf of employees for items governed by sections 105 and 106 of the tax code relating to health expenses.
The essential components of the HRA plan include a funding mechanism wherein monies are made available to employees for health expenses. The employer may hold these funds until needed, or individual accounts may be pre-funded and unused funds rolled over from year-to-year. Fund balances are owned by the employer, not the employee, and are not portable. COBRA guidelines, however, follow the HRA just like the medical plan.
The plan document is extremely flexible and slanted toward the employer’s choices for coverage, i.e., covering only the medical deductible or any combinations of plan provisions so designated in the plan document.
Eligible expenses may be reimbursed to employees in two ways: 1) as claims are made, or 2) individual accounts may be funded for each employee in advance of claims reimbursement with debit card access.
Plan Design Scenario
- The employer purchases a high deductible ($1000 up to $2500) health plan to decrease overall premium costs.
- Through implementation of an HRA plan, the employer uses a portion of the premium savings to "buy back" all or a portion of the deductible for the covered employees and dependents.
- The employee deductible is now less than $1000, or even zero!
- The employer’s HRA funding exposure is limited to the fixed amount set aside each year.
- Industry-wide since 2002, the employer’s average HRA payout has only been approximately 27% of the amount allocated (Employee Benefits News – November 2003)
- The employer reserves the option to rollover all or a portion of the "savings" each year to fund benefits for subsequent years.
Bill Brunk at 513.759.7644, or e-mail bbrunk@firstsourcebenefits.com.
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