What is an HRA?"Health Reimbursement Arrangements" are permissible under sections 105 and 106 of the Internal Revenue Code. These Code sections provide for the relief of taxation to the employee if an employer chooses to reimburse qualified medical expenses and operates the reimbursement plan according to certain rules. The types of expenses that can be reimbursed are found in IRS Code Section 213 and include many medical, dental, vision and other kinds of expenses. Code Section 213 also defines the expenses that may be reimbursed from a Medical Flexible Spending Account or that may be deducted from income by an individual tax payer.
Why offer an HRA?The reason to implement a Health Reimbursement Arrangement is usually found in the difference in cost between a higher level of group health insurance such as a rich HMO plan versus the lower cost of a "high deductible" plan. The employer makes a decision to risk some or all of the savings by "self-funding" the claims that are attributed to the out-of-pocket requirement (such the deductible or coinsurance) of the less expensive plan.
HRA Plan Design OptionsEmployers have several choices as to how the reimbursement plan can be tailored. In addition, the IRS requires that certain choices be made at the beginning of the plan year:
Definition of eligibility: Typically "Employees who participate in the employer's Group Health Plan are automatically enrolled as participants in this Plan effective as of the date coverage is effective under the Group Health Plan."
Definition of dependents: Typically either "all tax dependents of the employee" or "any tax dependent that is also covered under the Group Health Plan".
Eligible expenses must be clearly defined: Eligible expenses may be based upon the underlying health plan definition of expenses attributable to deductible and/or coinsurance, for example, or all Code Section 213 eligible expenses (all of the expenses reimbursable from a Flexible Spending Account).
Substantiation requirements: What is required for a claim to be reimbursed? Will proof of payment be required? An itemized provider bill copy and/or the carrier's Explanation of Benefits and the Group Dynamic claim form will usually be required. The employer may decide if "proof of payment" is also required. The items required for substantiation will depend upon the plan design.
The HRA plan dollar maximum must be defined: A monthly or quarterly cap can be used to protect cash flow.
Will carryover be permitted? Employers may decide if unused amounts will carryover from one HRA Plan Year to the next. If yes, will the employer cap the amount to be carried over? Note that carryover funds must stay in the HRA Plan - they cannot be paid as taxable income to the employee or moved to another plan such as the pension plan or a flexible spending account plan.
COBRA compliance is required: HRA plans are subject to COBRA continuation of coverage rules if the employer is obligated under the COBRA legislation. GDI will provide guidance and COBRA notice materials.
Will former employees continue to be covered? Notwithstanding the fact that continuation coverage applies to the HRA for a group that qualifies under COBRA legislation, the employer may also extend the use of the account to former employees. Typically this would mean the ability to "spend down" the balance in the account. It would not, however, mean that new money would be added in subsequent plan years.
Some employers offer Medical Flexible Spending Accounts (FSAs) in addition to an HRA: Since the HRA can only be funded by the employer, the FSA creates an additional account specifically funded by employees. The FSA allows employees to save pre-tax dollars toward out-of-pocket expenses not covered by the health insurance or the HRA. The employer saves the FICA match on employee contributions to the FSA. A choice can be made as to which plan will pay expenses first. If the HRA is designed to supplement the health insurance by reimbursing deductible expenses, usually employers do not require that the employee spend his/her FSA first.
Group Dynamic. Inc. claim payment options: GDI reimburses eligible HRA expenses directly to the employee at the home address. Claims are paid weekly and we offer direct deposit at no additional charge. Please refer to the HRA proposal for greater detail about our administrative capabilities and reimbursement options.