Health Reimbursement Arrangements

Transcription

1 Health Reimbursement Arrangements Health Reimbursement Arrangements (HRAs) are plans designed to help employers and employees lower health care costs. Allowed under sections 105 and 106 of the Internal Revenue Code, HRAs enable employers to reimburse employees for out-ofpocket medical not covered by insurance. HRAs are often combined with high-deductible health plan coverage. What are HRAs? HRAs are employer-paid health care arrangements that are often paired with highdeductible health plans to lower health care costs. Typically, an employer creates an unfunded HRA account for each participating employee and reimburses the employee up to the HRA s account balance for substantiated medical not covered by insurance, such as insurance deductibles and copayments. How do HRAs work? If an employer chooses to offer an HRA, it establishes eligibility rules, a maximum reimbursement amount and a list of eligible. (This list must comply with section 213(d) medical as defined in the Internal Revenue Code.) After incurring medical, employees submit claims to the HRA administrator for reimbursement. Tax implications For employers, all HRA reimbursements are tax-deductible. For employees, contribution amounts made by employers are tax-free and reimbursements for medical are also tax-free. Advantages Employers benefit from offering HRAs by reducing insurance costs and restructuring health benefits. By moving employees to high-deductible health plans, costs are more predictable and controlled as employees are encouraged to become better health care consumers. HRAs motivate employees to make better health care and future planning decisions. Employees benefit from the protection HRAs provide against catastrophic medical costs. HRA funds can be used to cover a wide range of health care, but unlike health flexible spending accounts (FSAs), HRAs can be designed to allow funds to be carried over year to year. However, unused HRA amounts may not be cashed out only carried over to the following year. Also, employers may establish account caps on total HRA account balances and include rollover maximums on carryover balances.

2 Health Reimbursement Account Savings Example Sample group 150 employees, plus 201 covered dependents Reduce health premiums by changing the deductible from $250 to $1,000. The HRA reimburses employees for the additional $750 out-of-pocket costs. Insurance Premium Savings: Total annual premium for group Old plan - $250 deductible = $259, New Plan - $1,000 deductible = $61, Premium savings with new plan = $197, Reimbursement Costs: Scenario: If 225 lives satisfy $1,000 deductible while others satisfy $250 or less (225 lives x $750 reimbursement) = $168, Net Savings: Subtract reimbursement costs from premium savings: $197, , Net Annual Savings = $29, Note: Savings not guaranteed. Individual results depend on actual employee incurred. What are not eligible for reimbursement through HRAs? The following are considered ineligible for HRA reimbursement: Medical not defined as eligible under an employer s plan. Medical that do not meet the definition of medical care under Internal Revenue Code section 213(d). Medical incurred by an employee, employee s spouse or any eligible dependents prior to the effective date in the program. Medical that can be reimbursed to an employee through another source, such as group health insurance. Reimbursement requests for ineligible should be denied. If an expense is deemed ineligible after it has already been paid, HRA participants may be required to provide reimbursement. If this happens and a participant fails to provide reimbursement, they may be required to pay income tax. Basic HRA legal requirements 1. Only Employer Contributions HRAs must be funded solely with employer contributions. No direct or indirect employee contributions are allowed. 2. No Cafeteria Plan Funding An HRA can be offered with a group health plan that is offered under a cafeteria plan; the HRA itself may not be funded with pre-tax salary reductions or otherwise under a cafeteria plan. 3. Reimbursements for Certain Individuals Only An HRA may reimburse medical care only if they were incurred by employees or former employees 2

3 (including retirees) and their spouses and tax dependents. Effective March 30, 2010, this also includes children who are under age 27 as of the end of the taxable year. HRA coverage must be in effect at the time the expense is incurred. 4. Reimbursements for Certain Medical Expenses Only HRAs may reimburse only substantiated medical described in Internal Revenue Code section 213(d). Such include out-of-pocket medical and health insurance premiums. If an HRA is also a health FSA, the HRA may not reimburse for long-term care services (premiums may be reimbursed). Under the health care reform law, effective Jan. 1, 2011, HRAs may be used to reimburse the cost of over-the-counter medicines or drugs only if they are purchased with a prescription. This rule does not apply to reimbursements for the cost of insulin, which will continue to be permitted even if purchased without a prescription. Also, effective for 2014 plan years, HRAs may not be used to reimburse health insurance premiums for individual coverage, inside or outside of the Exchanges. 5. No Cash-Out of Unused Amounts Unused HRA amounts cannot be cashed out and can only be used for reimbursement of medical care. If an HRA includes a spend-down feature, terminated employees can spend down their HRA balances for medical incurred after termination. After an employee s death, only reimbursement of qualifying medical of a surviving spouse or tax dependent is allowed. Qualified HSA distributions can be made from HRAs and directly rolled over into HSAs. 6. COBRA COBRA applies to an HRA. The legal issues surrounding COBRA and HRAs are complex, so consult with legal counsel. 7. Coordination with Health FSA HRA may be coordinated with a health FSA to modify which pays first. If no rule is established, the HRA pays first and the health FSA pays last. 8. Section 105 Nondiscrimination Rules Nondiscrimination rules apply to selfinsured medical plans and consequently are applicable to most HRAs. Under these rules, a self-funded HRA cannot discriminate in favor of highly compensated employees, and must satisfy the eligibility and benefits tests. 9. HIPAA Rules HRAs with a carryover feature are not in violation of the HIPAA nondiscrimination requirements. An HRA is a health plan that is subject to HIPAA s portability requirements (creditable coverage) and HIPAA s administrative simplification rules (privacy, security, electronic data interchange). 10. ERISA HRA is a welfare benefit plan and is covered under ERISA unless it is a governmental or church plan. How does the health care reform law impact HRA design? Before 2014, employers were able to offer HRAs either with another group health plan or without a health plan (that is, stand-alone HRAs). Also, before 2014, HRAs were sometimes used to help employees pay for the cost of individual insurance policies on a tax-free basis. Effective for plan years beginning on or after Jan. 1, 2014, the Affordable Care Act s (ACA) market reforms (for example, the prohibition on annual limits) apply to HRAs as follows: HRAs that are integrated with other group health plan coverage will not violate the ACA s market reforms, as long as the group health plan coverage is in compliance. An HRA cannot be integrated with individual market coverage for purposes of satisfying the ACA s market reforms. Effective for 2014 plan years, stand-alone HRAs (or HRAs that do not meet the requirements for integration) will not be permitted, unless the HRA qualifies for 3

4 an exception under the ACA. For example, retiree-only HRAs are not subject to the ACA s market reforms and may continue to be offered on a stand-alone basis. An HRA is considered integrated with an employer s group health coverage if, under the terms of the HRA, the HRA is available only to employees who are enrolled in another group health plan that does not consist solely of excepted benefits and certain other criteria are satisfied. Effective for 2014 plan years, employers cannot offer a stand-alone HRA for employees to purchase individual coverage, inside or outside of an Exchange, without violating the ACA s market reforms and risking exposure to severe financial penalties. Keep in mind that some HRAs are not subject to the ACA s market reforms because they fall under an exception, such as retiree-only HRAs. These HRAs may continue to be offered on a stand-alone basis. How do HRAs compare or differ from FSAs, HSAs and MSAs? HRAs are the only tax-favored accounts among this group that are owned and funded solely by employers. Unlike health FSAs and HSAs, there are no prescribed limits set by the IRS for HRAs. Also, unlike health FSAs but similar to MSAs and HSAs, the uniform coverage rule does not apply to HRAs. Also unlike health FSAs, but similar to HSAs and MSAs, HRA funds can be rolled over from year to year. The attached chart at the end provides further comparison among these tax-favored accounts. HRA and health FSA rules HRAs are generally but not always health FSAs, yet are not subject to the following FSA rules: Prohibition against carrying unused benefits into future plan years does not apply. The mandatory 12-month period of coverage does not apply, which gives employers more flexibility in designing an HRA. The uniform coverage rule does not apply, so the maximum amount of reimbursement under an HRA does not have to be available at all times during the period of coverage. An expense incurred by a participant in one year may be properly paid out of the HRA balance attributable to a subsequent year, provided that the individual was a participant when the expense was incurred and remains a participant in the subsequent year. HRAs may reimburse health insurance premiums. However, effective for 2014 plan years, HRAs cannot reimburse individual health insurance premiums. HRAs are not encumbered by certain HSA requirements or features. No HDHP is required. HRAs combined with another health plan allow for additional flexibility. Group health plan covered offered with an HRA does not have minimum deductibles or maximum out-of-pocket limitations. As explained above, the ACA prohibits most stand-alone HRAs effective for 2014 plan years. HRAs give plan sponsors more control (for example, employers can decide whether the HRA will forfeit balances at termination, and they can choose what qualified medical the HRA will cover). 4

5 HRAs have no limits on how much an employer can contribute in any given month, year or other coverage period. HRAs are not subject to the comparable contribution requirements but are subject to Internal Revenue Code section 105 nondiscrimination requirements. HRAs require less coordination with other plans than is required by an HSA. HRAs do not have to be funded and are often simply credits that are not backed by actual contributions. Coordination of benefits issues An individual may not have a general purpose HRA and contribute to an HSA. An individual may have certain types of HRA coverage and still be eligible for an HSA: o Limited purpose HRA o Suspended HRA o HDHP with post-deductible HRA coverage o Retirement HRA o Combination of the above Key plan design questions 1. Stand Alone HRA or HRA + health plan? a. Stand-Alone i. Limited availability due to the ACA s annual limit prohibition ii. iii. iv. Retiree-only b. HRA/Health Plan Reimbursement for excepted benefits, for example, dental or vision Preserve HSA eligibility i. High flexibility ii. Employer can limit the availability of HRA COBRA coverage to qualified beneficiaries who also elect health plan s COBRA coverage. 2. Who will be eligible to participate? As long as the HRA passes nondiscrimination testing, employers can cover all employees, only those participating in the health plan, only retirees or a limited class of employees. However, to be considered integrated with other group health coverage for purposes of the ACA s annual limit rules, HRA eligibility must be restricted to employees who are enrolled in other group health plan coverage (regardless of whether the employer sponsors the other group health coverage). For example, an HRA may be offered only to employees who do not enroll in the employer s group health plan but are enrolled in other non-hra group coverage, such as a plan maintained by the employer of the employee s spouse. Selfemployed individuals, including partners in a partnership and more than 2 percent shareholders in an S corporation cannot participate in an HRA on a taxfavored basis. 5

6 3. What are reimbursable? a. If an HRA is offered along with an HSA/HDHP, HRA coverage must be limited to certain, such as preventive care, or designed to permit reimbursements after the HDHP deductible has been met. b. Expenses an HRA can reimburse are limited to qualified medical ; however, an employer may choose to be more restrictive on what the plan will reimburse. 4. How much will the employer contribute? There is no specified cap on the amount an employer is allowed to contribute to an HRA. However, nondiscrimination rules apply to the benefits provided under HRAs. Employers must be careful to structure HRA contributions so that they do not discriminate in favor of highly compensated employees. An employer can choose to credit an employee s HRA account once per year, on a pro rata monthly basis or on each payday. 5. How will the HRA be funded? HRAs must be funded solely by the employer and may not be part of a cafeteria plan. Employers must decide whether the HRA will be funded through a separate account or whether reimbursements will be made from employer general assets (unfunded). Most employers maintain their HRAs on an unfunded basis. 6. Will carryovers be allowed? Employers may allow carryovers of unused account balances on HRAs, but they don t have to. Employers can allow unlimited carryovers or put limits on carryovers. Caps can be placed on the carryover amounts and plan sponsors can also set a maximum contribution each year. 7. How will reimbursements be processed? Because substantiation is required for HRA reimbursements, and due to privacy concerns, employers may consider hiring a third-party administrator (TPA) to substantiate claims. Employers should complete a due diligence of TPAs and have service agreements and business associate contracts reviewed by counsel. Employers should also consider if they want caps on reimbursements. If the employer also sponsors a health FSA, the employer should consider how the claims will be ordered. 8. Forfeit account balances or permit spend-downs? An employer may choose either to forfeit unused amounts in an employee s HRA when the employee terminates employment or allow employees to spend down their accounts. COBRA must be offered. HRAs may or may not be the right solution for all employers. Please contact your The Wladis Companies, Inc. representative for assistance in determining what taxadvantaged account will best meet your goals. This copy of Plan Designs is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice. 2007, Zywave, Inc. All rights reserved. 6

7 Comparison of Tax-Advantaged Accounts HSA MSA HRA FSA Name of account Health Savings Account Medical Savings Account Health Reimbursement Arrangement Who owns the account? Individual/employee Individual/employee Employer Employer Who may fund the account? What plans may be offered with the taxadvantaged account? Is there a limit on the amount that can be contributed per year? Does the uniform coverage rule apply? Employer or employee, can be both in the same year Employee can contribute pretax dollars through Section 125 plan An HDHP as follows: Min. Deductible $1,250 Ind. $2,500 Family (2014) $1,300 Ind. $2,600 Family (2015) OPM $6,350 Ind. $12,700 Family (2014) $6,450 Ind. $12,900 Family (2015) $3,300 Ind. $6,550 Family (2014) $3,350 Ind. $6,650 Family (2015) Catch-up contributions: $1,000/year age 55 by end of tax year Reduced by MSA contributions in same year Employer or employee, but not both in the same year Must be small employer or self-employed individual An HDHP as follows: Min. Deductible $2,200 Ind. $4,350 Family** $2,200 Ind. $4,450 Family*** Max. Deductible $3,250 Ind. $6,550 Family** $3,300 Ind. $6,650 Family*** OPM $4,350 Ind. $8000 Family** $4,450 Ind. $8,150 Family*** 65% of individual deductible 75% of family deductible Employer* Effective for 2014 plan years, an employer must offer a health plan and the HRA must be considered integrated with group health plan coverage. Stand-alone HRAs are not permitted unless they are limited to excepted benefits or fall under an exemption to the Affordable Care Act (ACA). No, there is no IRS prescribed limit No No No Yes *Self-employed individuals, including partners, and more than 2% shareholders in a subchapter S-corporation cannot contribute. ** For 2014; ***For 2015 Health Flexible Spending Account Employer/employee* Typically the employee contributes pre-tax dollars through a Section 125 plan Effective for 2014 plan years, health FSAs must qualify as excepted benefits to satisfy ACA reforms. To qualify as an excepted benefit, the FSA must meet a maximum benefit requirement and other group health plan coverage must be offered by the employer. Effective for taxable years beginning after Dec. 31, 2012, employees may not elect to contribute more than $2,500 per year to a health FSA offered through a cafeteria plan. For 2014, the amount remains at $2,500. However for taxable years beginning on Jan. 1, 2015 the amount increases to $2,550.

8 Comparison of Tax-Advantaged Accounts Can unused funds be rolled over from year to year? What are eligible for reimbursement? Must claims submitted for reimbursement be substantiated? May account reimburse non-medical? Is interest earned on the tax-advantaged account? HSA MSA HRA FSA Yes Yes Yes No, with two exceptions. If the FSA allows, unused amounts may be used for incurred during a grace period of 2-1/2 months after end of plan year. Also, if the FSA does not incorporate a grace period, it may allow employees to carry over up to $500 in unused funds into the next plan year. Section 213(d) medical Effective 12/31/10, OTC medicine or drug cannot be reimbursed unless they are prescribed or are insulin. -COBRA premiums -QLTC premiums -Health premiums while receiving unemployment benefits -If Medicare eligible due to age, health insurance premiums except medical supplement policies Section 213(d) medical Effective 12/31/10, OTC medicine or drug cannot be reimbursed unless they are prescribed or are insulin. -COBRA premiums -QLTC premiums -Health premiums while receiving unemployment benefits Section 213(d) medical Effective 12/31/10, OTC medicine or drug cannot be reimbursed unless they are prescribed or are insulin. Health insurance premiums for current employees, retirees, and qualified beneficiaries, and QLTC premiums Effective for 2014 plan years, cannot reimburse health insurance premiums for individual coverage Employer can define eligible medical No Yes Yes Yes Yes, but taxed as income and 20% penalty (no penalty if distributed after death, disability, or age 65) Yes, but taxed as income and 20% penalty (no penalty if distributed after age 65, death or disability) Yes, accrues tax-free Yes, accrues tax-free Yes, paid to the employer No No Section 213(d) medical Effective 12/31/10, OTC medicine or drug cannot be reimbursed unless they are prescribed or are insulin. Expenses for insurance premiums are not reimbursable Employer can define eligible medical No This Chart is provided to you for informational purposes only. Please seek qualified and appropriate counsel for advice on how to apply the topics discussed herein to your employee benefits plan. (3/04, 1/15) Zywave, Inc. This Chart is provided to you for informational purposes only. Please seek qualified and appropriate counsel for advice on how to apply the topics discussed herein to your employee benefits plan. (3/04, 11/13) Zywave, Inc.