Health Reimbursement Arrangements:

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1 Health Reimbursement Arrangements: Frequently Asked Questions for Employers This document addresses the most common questions employers have when considering a Health Reimbursement Arrangement (HRA) for their businesses. To help you find the information you need quickly and easily, questions are categorized as follows: General HRA Questions Zane Benefits Technology Questions HRA Plan Design Questions HRA Participation Questions Individual Insurance Questions HRA Regulatory Questions General HRA Questions Q. What is an HRA? A. An HRA is an employer-funded plan that may be used to reimburse employees for medical expenses. An HRA is not health insurance, but can be used to supplement health insurance benefits and pay for a range of medical expenses not covered by insurance. Q. Where do employers keep the HRA accumulated balances? Do they send the money to Zane Benefits or set up a separate HRA account to keep track of the liability? A. HRAs are notional arrangements; no funds are expensed until reimbursements are paid. With a Zane Benefits solution, employers reimburse employees directly only after the employees incur approved medical expenses. Zane Benefits recommends employers pay reimbursements out of the employer s general funds (e.g., general purpose bank account) via direct deposit, payroll or check. The HRA liability is tracked in realtime on the employer s Zane Benefits HRA plan website. Q. Is there an HRA contribution limit (as there is for Health Savings Accounts?) A. No. There is no limit to the amount of money an employer can contribute to an employee s HRA. Q. Can I set up an HRA for my family? A. No. HRAs can only be created by an employer for the benefit of employees, former employees and retired employees. However, funds in the HRA can be used for expenses of these groups and their dependents.

2 Q. What are the tax benefits of implementing an HRA? A. Reimbursements made are tax-free to employees and tax-deductible for employers. HRA reimbursements are not included in employees income (and thus not subject to any withholding or any income or wage taxes). From an employer s point of view, the HRA reimbursements are treated the same way as premiums paid for a group insurance policy (deductible as a business expense for fringe benefits) or other business expenses; they are deducted from revenues to determine taxable income. There are limits/restrictions on HRA use by proprietors, partners and S-Corp shareholders. Q. What types of expenses are allowed for reimbursement through an HRA? A. An HRA may reimburse any expense considered to be a qualified medical expense by the IRS, including premiums for personal health insurance policies in many states. Within the IRS rules, employers may restrict the list of reimbursable expenses in any way they choose. For more information, see IRS Publication 502 or call us at to request a copy of our Overview of HRA-Reimbursable Eligible Medical Expenses. Q. Can I roll HRA balances from year to year? A. Yes. HRA balances may roll forward from year to year. Employers can prevent balances from rolling over; however, doing so defeats one of the HRA's advantages. Employers may allow employees to have access to their HRA accounts after retirement; however, employers may not pay a balance to any employee in cash or other benefits. Q. How should my accountant keep track of the HRA allowances? A. For financial reporting purposes (as of the balance sheet date) companies will want to accrue a liability on their balance sheets for the portion of unused past HRA contributions that they believe will ultimately be used. Currently, no specific accounting standards exist for recording an HRA liability, and we are not aware of any disclosure requirements. The most conservative treatment is to accrue 100% of the unused HRA contributions on the balance sheet date. Employers are not required to report their HRA obligation to the IRS. Employers with more than 100 employees do need to report the total reimbursements made during the year on IRS Form Zane Benefits Technology Questions Q. Can I administer and supervise my own HRA and still use your software? If so, is there a difference in price? A. Zane Benefits gives you full control over your HRA plan design, which you may modify at any time. Technically, you (the employer) are the Plan Administrator. Zane Benefits will process claims for you. This service is included in the price of your Zane Benefits solution and may not be unbundled. Q. How much time will it take to learn the software and administer the plan? A. Zane Benefits technology platform was designed to make HRA administration simple and painless for employers with two to 20,000 employees. Employers generally learn to use their Zane Benefits HRA plan with a one-hour demonstration teleconference and spend one half hour to two hours per month performing reimbursements.

3 Q. Why are your set-up fees higher than other third-party administrators (TPAs)? A. Zane Benefits is not a TPA. Our solutions are competitively priced based on the advantages provided. Zane Benefits best-in-class, customizable platform is easy and convenient to use, creates costs savings and enables you to create a benefit plan that matches your company s business objectives. One of our Health Benefit Specialists will be glad to show you why our solutions offer more value than other health benefit providers or HRA administrators. Q. Will you provide on-site training for our employees? A. Zane Benefits provides customized welcome packets to your employees with easy-to-follow instructions for submitting claims and learning about their plan as well as unlimited online and telephone support. For larger employers, Zane Benefits may provide on-site employee training for an additional cost-based fee. HRA Plan Design Questions Q. What defines an employee class? A. Employee classes are defined by the employer and must be based on genuine distinctions between employees. Criteria that may be used to define a class include job description, length of service, full-time versus part-time status, active versus retired status, geographic location and membership in a collective bargaining agreement (union). Employers may also give different benefits to employees based on the employees choice of plan (e.g., an HRA may be available only to those selecting a high-deductible group plan or only to those opting out of a group plan). Employees with chronic or other adverse health conditions may receive richer benefits but may not be discriminated against by receiving reduced benefits. Q. Can I only offer an HRA to my key employees? A. All employees in the same class should be treated equally. An HRA does not have to benefit all employees so long as the benefits to one or more classes of employees is not found to be discriminatory in favor of highly compensated individuals. Q. Can I give different allowances to different employees? A. Employees in different employee classes may receive different allowances and different benefits. All employees in the same class should be treated equally. Q. How can I minimize my exposure? A. Zane Benefits reporting features make real-time monitoring of HRA liabilities, reimbursements and utilization easy. Employers can change plan benefits at any time, or cancel the entire plan at any time. Further, Zane Benefits solutions allow employers to establish plan-year maximum reimbursements for any given category of expense (e.g., dental) and to establish a maximum balance that any participant class may hold at a time.

4 HRA Participation Questions Q. What are the advantages of setting up an HRA for a sole-proprietorship or Limited Liability Company (LLC)? A. An HRA allows any company to reimburse employees tax-free for medical expenses, at whatever level of funding the employer wishes or can afford. While the business owners may use the HRA platform to reimburse themselves for medical expenses, these reimbursements must be reported as income. Q. Can I offer an HRA benefit to my independent contractors? A. Zane Benefits solutions make it easy to reimburse independent contractors for qualified medical expenses. Contractors who do not earn W-2 wages may not participate in an HRA health plan with tax-free dollars; however, they may still receive reimbursements as long as they are reported as income and taxed. Independent contractors can go to the company s Zane Benefits HRA website to view their total income from reimbursements each year. Q. Can an owner participate in the HRA? A. All current or former employees may participate in an HRA. However, employees who are also "Owners" (e.g. sole proprietors, partners, or S-Corp shareholders that own >2% of the company's shares) may not participate. Spouses of these Owners may participate in an HRA if they are bona fide employees of the business. Such spouses may use their HRA to reimburse expenses for any qualified dependent, including their spouses (the Owners). The Owners specified above may receive reimbursement from their companies for medical expenses, and they may use Zane Benefits' solutions to track these. In these cases, reimbursements must be reported on the owners /partners wages (on their W-2 and 1040 forms) subject to federal income tax withholding. However, the reimbursements are exempt from Social Security, Medicare and Federal Unemployment Tax Act (FUTA) taxes, similar to profits passed through to the owner. Further, the cost of the reimbursements is a deductible expense to the business, reducing the taxable income of the business and, thus, reducing the taxable income of the owners/partners (because these are flow-through tax entities). In this sense, the HRA is essentially tax-neutral for owners but may allow them to avoid wage taxes on some income. Sole proprietors and other self-employed individuals receive an above-the-line tax deduction for personal health insurance premiums. IRS Notice clarified that S-Corp owners may only take the self-employed health insurance premium tax deduction (on Form 1040) if the S-Corp pays for or reimburses the owner for the premiums. Administering these reimbursements is easy to do with Zane Benefits solutions.

5 Individual Insurance Questions Q. Which is better: an individual or a group plan? A. There are several key differences between personal and group health insurance policies. In 45 states, personal policies are subject to medical underwriting, which makes them much less expensive than group policies for healthy individuals. However, individuals with adverse or existing conditions may not be able to obtain coverage. In most states, unhealthy individuals can obtain guaranteed coverage from a state risk pool at a cost somewhat higher than a group policy or from a spouse s group plan. Group policies are more expensive but guarantee the same coverage to every participant. Q. I am setting up a SimpleHRA but don t want to leave my employees on their own for individual/family policies. How can I help them find insurance coverage? A. Any employee participating in a SimpleHRA may learn about and shop for a personal policy online, or by calling his/her insurance agent, an insurance agency recommended by the employer, or an insurance carrier that offers plans in the employee's state. Q. Does SimpleHRA work in New York, New Jersey, Massachusetts, Vermont and Connecticut? A. State regulations (community-rating of individual policies) remove some of the price benefit of individual policies in these states. GroupHRA may provide the better value as well as being quicker to implement. However, where different employees have very different needs, SimpleHRA provides more flexibility. Q. Can I use an HRA to reimburse my employees for their personal health insurance premiums? A. Yes. However, some states have enacted regulations on insurance carriers that make it difficult for employees to obtain a personal policy if they receive premium reimbursement from their small employers. To help employers using SimpleHRA avoid putting their employees in a position where the may be declined for a personal insurance policy, Zane Benefits has compiled a list of states which, to our knowledge, have regulations that may restrict insurance carriers. Alabama Arizona California Colorado Connecticut Idaho Indiana Iowa Kentucky Maryland Minnesota Mississippi Montana Nebraska Nevada North Carolina North Dakota Ohio Oklahoma Oregon Rhode Island Tennessee Texas* Virginia Wyoming *The Texas Insurance Commissioner has stated that similar rules apply regardless of employer size.

6 For employers in the above states, Zane Benefits suggests that they set up an HRA to reimburse employees for out-of-pocket medical expenses only (including under-deductible expenses but excluding health insurance premiums) and encourage their employees to buy high-deductible personal insurance policies themselves. In many cases, employees can buy personal policies for less than the employee-paid portion of traditional group insurance premiums. This approach may also be recommended in other states even when there is no regulatory issue. This strategy can help employers achieve their goals of limiting participation in the HRA to only those participants who are willing to contribute to the cost of their coverage (i.e., have employees pay their own premium but provide the HRA to reimburse under-deductible expenses). HRA Regulatory Questions Q. I read that HRAs are illegal in some states Is this true? A. No. Any U.S. employer may create and use an HRA in any state. Some states have regulations that make it difficult for employees to find personal health insurance policies if the premium is being reimbursed or paid by their employer through an HRA, cafeteria plan or otherwise. See the question in the previous section, Can I use an HRA to reimburse my employees for their personal health insurance premiums? 2008 Zane Benefits, Inc. All rights reserved. GroupHRA and SimpleHRA are trademarks of Zane Benefits, Inc. ERFAQ