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2 Table of Contents Plan Designs: Health Reimbursement Arrangements...3 Comparison of Tax-Advantaged Accounts...10 Key HRA Decision Points...12 Consumer-Directed Healthcare: Employee Communication Timeline...14 Sample Employee Communications Section...16 Understanding an HRA...17 HRA Announcement Letter...20 HRA Payroll Stuffer...21 HRAs: Case Study HRA Binder - Page 2 of 22

3 Health Reimbursement Arrangements Health Reimbursement Arrangements (HRAs) are plans designed to save money for employers and employees. Allowed under Section 105 of the Internal Revenue Code, HRAs enable employers to reimburse employees for out-of-pocket medical expenses not covered by insurance. HRAs are usually combined with high deductible health insurance plans (HDHPs), as employers try to control costs, increase savings, benefit from tax advantages and expand employee benefits. What are HRAs? HRAs are healthcare accounts entirely funded through employers. HRAs are designed to reimburse employees for medical expenses not covered by insurance, such as insurance premiums, deductibles and copays. How do HRAs work? Employers choose whether they want to offer an HRA. If they do, they establish a contribution amount, reimbursement distribution schedule and define a list of eligible expenses. (This list must comply with Section 213(d) medical expenses as defined in the IRS code and includes health insurance premiums for current employees, retirees, and qualified beneficiaries and qualified long term care premiums.) Employers can also include account caps on total HRA account balances and include rollover maximums on carryover balances. Employees then use these HRA funds to pay for uncovered medical expenses. What are the tax implications of HRAs? For employers, all HRA reimbursements are tax-deductible. For employees, all contribution amounts made by employers are tax-free. Interest earned on accounts goes to employers. What are the advantages of HRAs? 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 healthcare consumers. HRAs motivate employees to make better healthcare and future planning decisions. HRA Binder - Page 3 of 22

4 Employees benefit from the protection HRAs provide against catastrophic medical costs. HRA funds can be used to cover a wide range of healthcare expenses, but unlike cafeteria plan Flexible Spending Accounts (FSAs), HRAs allow funds to be carried over year to year. 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 expenses incurred. What expenses are not eligible for reimbursement through HRAs? The following expenses are considered ineligible for HRA reimbursement: Medical expenses not defined as eligible under an employer s plan. Medical expenses that do not meet IRS section 213(d) requirements. Medical expenses incurred by an employee, employee s spouse or any eligible dependents prior to an effective date in the program. Medical expenses that can be reimbursed to an employee through another source, such as group health insurance. Ineligible expense reimbursement requests are deniable. If an expense is deemed ineligible after its already been paid, HRA account holders may be required to provide reimbursement. If this happens and an account holder fails to provide reimbursement, they may be required to pay income tax. For a complete list of eligible and ineligible HRA reimbursement expenses, please refer to IRS Publication HRA Binder - Page 4 of 22

5 Basic HRA Legal Requirements 1. Only Employer Contributions HRA 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 HDHP 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 expenses only if they were incurred by employees or former employees (including retirees) and their spouses and tax dependents. HRA coverage must be in effect at the time the expense is incurred. 4. Reimbursements for Only Certain Medical Expenses HRAs may reimburse only substantiated medical expenses described in Code 213(d). Such expenses include out-of-pocket medical expenses and health insurance premiums. If an HRA is also a FSA, the HRA may not reimburse for long-term care services (premiums may be reimbursed). 5. No Cash-Out of Unused Amounts Unused HRA amounts cannot be cashed out and can only be used for reimbursement of medical care expenses. Terminated employees can spend down their HRA balances for medical expenses incurred after termination. After an employee s death, only reimbursement of qualifying medical expenses 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, HRA pays first and FSA last Nondiscrimination Rules - Apply to self-insured medical plans and consequently are applicable to most HRAs. Cannot discriminate in favor of highly compensated employees, and must satisfy the eligibility and benefits tests. 9. HIPAA Nondiscrimination 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. HRA Binder - Page 5 of 22

6 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. HRAs are similar to FSAs in that they can be offered with any or no health plan, and there are no prescribed limits set by the IRS. However, unlike FSAs but similar to MSAs and HSAs, the uniform coverage rule does not apply to HRAs. Also unlike FSAs, but similar to HSAs and MSAs, HRA funds can be rolled over from year to year. The attached chart provides further comparison among these tax-favored accounts. HRA and FSA Rules HRAs are generally but not always 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, and 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. HRAs are not encumbered by certain HSA requirements or features. No high-deductible health plan is required. Stand alone HRAs or HRAs combined with another health plan allowed for additional flexibility. HRAs do not require minimum deductibles and maximum out-of-pocket limitations. HRAs give plan sponsors more control (e.g. forfeit balances at termination, choose what qualified medical expenses the HRA will cover). HRAs have no limits on how much an employer can contribute in any given month, year or other coverage period. HRA Binder - Page 6 of 22

7 HRAs are not subject to the comparable contribution requirements but are subject to 105 nondiscrimination requirements which allow for more flexibility. 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. HRAs have fewer limitations on using funds for health insurance premiums. 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 + HDHP? a. Stand-Alone i. HRA to reimburse specific types of qualified medical expenses ii. Retiree health plan iii. Reimbursement preventive care, dental, or vision expenses iv. Preserve HSA Eligibility v. Coverage for Executive Physicals b. HRA/HDHP i. High flexibility ii. Employer can limit the availability of HRA COBRA coverage to qualified beneficiaries who also elect HDHP COBRA coverage. HRA Binder - Page 7 of 22

8 2. Who will be eligible to participate? As long as the HRA passes nondiscrimination testing, employers can cover all employees, only those participating in HDHP, only those participating in an HSA, only retirees or a limited class of employees. Self-employed individuals, including partners in a partnership and more than 2 percent shareholders in an S corporation cannot participate on a tax-favored basis. 3. What expenses are reimbursable? a. If an HRA is offered along with HSA/HDHP, HRA coverage must be limited to certain expenses, e.g. preventive care, or designed to permit reimbursements after HDHP deductible has been met. b. Expenses an HRA can reimburse are limited to qualified medical expenses; 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, but reimbursements may not exceed a maximum dollar limit per coverage period. Without a dollar limit, the HRA could favor highly compensated employees. The dollar limit does not have to be the same for all employee groups (e.g. individual coverage, family coverage) provided the plan is in compliance with nondiscrimination rules. An employer can choose to credit an employee s HRA account once per year or on a pro rata monthly basis. 5. How will the HRA be funded? HRAs must be funded solely by the employer and may not be part of a cafeteria plan. Decide whether it s funded through a VEBA 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? HRAs may allow carryovers of unused account balances, but they don t have to. Employers can allow unlimited carryovers or put limits on carryovers. Caps can be placed on the carryover amounts. HRA Binder - Page 8 of 22

9 7. How will reimbursements be processed? Because substantiation is required for HRA reimbursements, and because of 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, 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 his or her account. COBRA must be offered. HRAs may not be the right solution for all employers or individuals. Please contact your Corporate Health Systems, Inc representative for assistance in determining what tax-advantaged account will best meet your goals. Corporate Health Systems, Inc welcomes the opportunity to help your organization examine its plan design(s) and make recommendations for improvement. This copy of Plan Designs is not meant to be provided as legal advice. Readers seeking legal advice should contact an attorney. (PKN 10/07) HRA Binder - Page 9 of 22

10 Comparison of Tax-Advantaged Accounts HSA MSA HRA FSA Name of account Health Savings Account Medical Savings Account Health Reimbursement Arrangement Health Flexible Spending Account Who owns the account? Individual/employee Individual/employee Employer Individual/employee Who may fund the account? Employer or employee, can be both in the same year Employee can contribute pretax dollars through Section 125 plan Employer or employee, but not both in the same year Must be small employer or self-employed individual Employer* Employer/employee* Typically the employee contributes pre-tax dollars through a Section 125 plan What plans may be offered with the taxadvantaged account? An HDHP as follows**: Min. Deductible $1,100 I $2,200 F OPM $5,600 I $11,200 F An HDHP as follows**: Min. Deductible $1,950 I $3,850 F Max. Deductible $2,900 I $5,800 F OPM $3,850 I $7,050 F Any or no health plan Any or no health plan Is there a limit on the amount that can be contributed per year? $2,900 I $5,800 F** Catch-up contributions: $900/year age 55 by end of tax year 65% of individual deductible 75% of family deductible No, there is no IRS prescribed limit No, there is no IRS prescribed limit Reduced by MSA contributions in same year Does the uniform coverage rule apply? No No No Yes *Self-employed individuals, including partners, and more than 2% shareholders in a subchapter S-corporation cannot contribute. **For calendar year HRA Binder - Page 10 of 22

11 Comparison of Tax-Advantaged Accounts HSA MSA HRA FSA Can unused funds be rolled over from year to year? Yes Yes Yes, subject to COBRA No, but in some cases employee may elect COBRA through end of plan year What expenses are eligible for reimbursement? Section 213(d) medical expenses -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 expenses -COBRA premiums -QLTC premiums -Health premiums while receiving unemployment benefits Section 213(d) medical expenses Health insurance premiums for current employees, retirees, and qualified beneficiaries, and QLTC premiums Employer can define eligible medical expenses Section 213(d) medical expenses Expenses for insurance premiums are not reimbursable Employer can define eligible medical expenses Must claims submitted for reimbursement be substantiated? No Yes Yes Yes May account reimburse non-medical expenses? Yes, but taxed as income and 10% penalty (no penalty if distributed after death, disability, or eligible for Medicare) Yes, but taxed as income and 15% penalty; no penalty if after age 65 No No Is interest earned on the tax-advantaged account? Yes, accrues tax-free Yes, accrues tax-free Yes, paid to the employer 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. (RK/AH 3/04, JK rev. 6/07) Zywave, Inc. HRA Binder - Page 11 of 22

12 Key HRA Decision Points Here are questions to think about for an employer considering HRAs or HDHP/HRAs: Determining Objectives for the Company Is your primary goal to save money on health costs or to move toward employee-driven health care decisions? What is your strategic timeline for making these changes? How much ground have you plowed with employees in helping them understand the magnitude of the health premium costs effect on your business and ultimately on employees financial security? How will your choice of health care plans affect the recruiting and retaining of talent? What is your corporate culture today and how well does your organization embrace change? Company characteristics that influence the ability to introduce HSAs include paternalistic culture, high turnover, communication ability and recent major changes in workforce or benefits. What characteristics of employees would tend to make them more interested in one approach or another? Age, gender, time at company, personal situations, number of dependents, salary? How well do you know what your employees want? Ten Key Plan Design Questions 1. Stand Alone HRA or HRA + HDHP? a. Stand-Alone i. HRA to reimburse specific types of qualified medical expenses ii. Retiree health plan iii. Reimbursement preventive care, dental, or vision expenses b. HRA/HDHP i. High flexibility ii. Employer can limit the availability of HRA COBRA coverage to qualified beneficiaries who also elect HDHP COBRA coverage. 2. Who will be eligible to participate? HRA Binder - Page 12 of 22

13 As long as the HRA passes nondiscrimination testing, employers can cover all employees, only those participating in HDHP, only those participating in an HSA, only retirees or a limited class of employees. 3. What expenses are reimbursable? c. If HRA offered along with HSA/HDHP, HRA coverage must be limited to certain expenses, e.g. preventive care, or designed to permit reimbursements after HDHP deductible has been met. d. Expenses an HRA can reimburse are limited to qualified medical expenses; 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, but reimbursements may not exceed a maximum dollar limit per coverage period. Without a dollar limit the HRA could favor highly-compensated employees. The dollar limit does not have to be the same for all employee groups (e.g. individual coverage, family coverage) provided the plan is in compliance with nondiscrimination rules. 5. How will the HRA be funded? HRAs must be funded solely by the employer. Decide whether funded through a VEBA or whether reimbursements will be made from employer general assets (unfunded). 6. Will carryovers be allowed? HRAs may allow carryovers of unused account balances, but they don t have to. Employers can allow unlimited carryovers or put limits on carryovers. 7. How will reimbursements be processed? Because substantiation is required for HRA reimbursements, and because of 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, consider how the claims will be ordered. 8. Design employee communication, education and support tools. 9. Adopt a plan document and distribute Summary Plan description to employees. 10. Make sure HRA Plan is compliant with HIPAA, COBRA, Medicare Part D and other federal group health plan mandates. HRA Binder - Page 13 of 22 This article 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.

14 Consumer-Directed Healthcare Employee Communication Timeline WEEK 1 WEEK 2 WEEKS 3 & 4 Preparation Phase 1 Educate employers: Presentations to HR and senior leadership 2 Decide on plan design All About HRAs Power Point Presentation Announcement / Awareness Phase 3 Communication from leadership to all employees on new benefits strategy; send out HRA Announcement Letter 4 Presentations to key management, opinion leaders, and early adopters 5 Brainstorm with company leaders, HR, payroll, and work team leaders on the best ways to promote HRA to employees 6 Determine employee groups Education Phase 7 Use announcements, poster series, and employee pieces to educate employees on HRA features. Related Templates: Healthcare Consumerism What You Need to Know HRA Case Studies Understanding an HRA HRA Poster Series HRA Plan Design Key HRA Decision Points HRA Announcement Letter HRA Binder - Page 14 of 22 Presented to you by Corporate Health Systems, Inc

15 Consumer-Directed Healthcare Employee Communication Timeline WEEKS 5 & 6 WEEKS 7 & 8 2 WEEKS PRIOR MONTHLY TO GOING LIVE Employee Buy-In Phase One-on-one is best Presentations Sell from the bottom up Open Enrollment Period 9 - Set up enrollment deadline Vendor to provide new customer Getting Started guide Summary Plan Description 8 - Market Key Selling Points: 1) No Use it or Lose it rule 2) Funded exclusively with employer money 3) HRA payments are tax-free to employers Tips for health consumers Related Templates: HRA Eligible Expenses HRA Ineligible Expenses HRA series Live Well, Work Well series HRA Case Studies HRA Binder - Page 15 of 22

16 Sample Employee Communications HRA Binder - Page 16 of 22

17 What is a Health Reimbursement Arrangement? A Health Reimbursement Arrangement (HRA) is an employer-funded account that is designed to reimburse employees for qualified medical expenses that are paid for out-of-pocket. There are no annual contribution limits on HRAs; however, the employer usually sets the contribution below the annual deductible. HRAs are often designed to operate with a high deductible health plan (HDHP), thereby reducing premium costs while encouraging employees to spend wisely. Your employer sets up the HRA, determines the amount of money available in each employee s HRA for the coverage period, and establishes the types of expenses the funds can be used for. What are the benefits of an HRA? You may enjoy several benefits from having an HRA: Contributions made by your employer can be excluded from your gross income. Reimbursements may be tax-free if you pay qualified medical expenses. Any unused amounts in the HRA can be carried forward for reimbursements in later years. Who is eligible for an HRA? HRAs are employer-established benefit plans. These may be offered in conjunction with other employer-provided health benefits. Employers have complete flexibility to offer various combinations of benefits in designing their plan. You do not have to be covered under any other health care plan to participate. Self-employed persons are not eligible for an HRA. Certain limitations may apply if you are a highly-compensated participant. An HRA may reimburse medical care expenses only if they are incurred by employees or former employees (including retirees) and their spouses and tax dependents. HRA coverage must be in effect at the time the expense is incurred. What is a High Deductible Health Plan (HDHP)? A HDHP has: A higher annual deductible than typical health plans; and A maximum limit on the sum of the annual deductible and out-of-pocket medical expenses that you must pay for covered expenses. Out-of-pocket expenses include copayments and other amounts, but do not include premiums. An HDHP may provide preventive care benefits without a deductible or with a deductible below the minimum annual deductible. Preventive care includes, but is not limited to, the following: 1. Periodic health evaluations. 2. Routine prenatal and well-child care. 3. Child and adult immunizations. 4. Tobacco cessation programs. 5. Obesity weight-loss programs. 6. Screening services (i.e. cancer, heart and vascular diseases, infectious diseases, etc.). HRA Binder - Page 17 of 22

18 Amount of Contribution Your employer funds the account, so it costs you nothing out-of-pocket. There is no limit on the amount of money your employer can contribute to the accounts. Additionally, the maximum reimbursement amount credited under the HRA in the future may be increased or decreased by amounts not previously used. The maximum annual contribution is determined by your employer s plan document. There may also be a cap amount for the HRA. Your employer can choose to fund your HRA with an annual contribution or on a monthly basis. Distributions from an HRA Distributions from an HRA must be paid to reimburse you for qualified medical expenses you have incurred. The expense must have been incurred on or after the date you are enrolled in the HRA. Debit cards, credit cards, and stored value cards given to you by your employer can be used to reimburse participants in an HRA. If the use of these cards meets certain substantiation methods, you may not have to provide additional information to the HRA. If any distribution is, or can be, made for other than the reimbursement of qualified medical expenses, any distribution (including reimbursement of qualified medical expenses) made in the current tax year is included in gross income. For example, if an unused reimbursement is payable to you in cash at the end of the year, or upon termination of your employment, any distribution from the HRA is included in your income. This also applies if any unused amount upon your death is payable in cash to your beneficiary or estate, or if the HRA provides an option for you to transfer any unused reimbursement at the end of the year to a retirement plan. If the plan permits amounts to be paid as medical benefits to a designated beneficiary (other than the employee's spouse or dependents), any distribution from the HRA is included in income. However, if before August 15, 2006, the plan contains such a provision, this rule will not apply until plan years beginning after December 31, Reimbursements under an HRA can be made to the following persons: 1. Current and former employees 2. Spouses and dependents of those employees 3. Employees covered tax dependents 4. Spouses and dependents of deceased employees Qualified Medical Expenses Qualified medical expenses are those specified in the plan that would generally qualify for the medical and dental expenses deduction. Examples include amounts paid for doctors' fees, prescription and non-prescription medicines, and necessary hospital services not paid for by insurance. You can use your HRA funds for deductibles, copayments and coinsurance. Balance in an HRA Amounts that remain at the end of the year may be carried over to the next year depending on your employer s plan design. Your employer is not permitted to refund any part of the balance to you. These amounts may never be used for anything but reimbursements for qualified medical expenses. What if I terminate my employment during the Plan Year? If you cease to be an Eligible Employee (e.g. you die, retire, or terminate employment), your participation in the HRA Plan will end unless you elect COBRA continuation coverage. You will be reimbursed for any medical care expenses incurred prior to your termination date, up to your account balance in the HRA, provided that you comply with the plan reimbursement request HRA Binder - Page 18 of 22

19 procedures required under the plan. Any unused portions will be unavailable after termination of employment. The rules regarding COBRA are contained within your Summary Plan Description. Will I have any administrative costs under the HRA plan? Generally, no. Your employer bears the entire cost of administering the HRA plan while you are an employee. How long will the HRA plan remain in effect? Although your employer expects to maintain the HRA plan indefinitely, it has the right to terminate the HRA plan at any time. Your employer also has the right to amend the HRA plan at any time and in any manner that it deems reasonable, in its sole discretion. Are my benefits taxable? The HRA plan is intended to meet certain requirements of existing federal tax laws, under which the benefits that you receive under the HRA Plan generally are not taxable to you. Your employer cannot guarantee the tax treatment to any given participant, since individual circumstances may produces differing results. What is the difference between an HRA and FSA? HRAs are employer-funded, which means your employer determines the amount that goes into the HRA account. FSAs are employee-funded, which means the funds are deducted from your salary. You determine the amount to go into your FSA account. What does the IRS require me to report on my taxes concerning my HRA? Nothing. Your HRA is a health benefit. HRA Binder - Page 19 of 22

20 ABC Company Dear ABC Company Employees: It s no secret that healthcare costs are getting less affordable every day. And the cost to provide healthcare coverage continues to escalate. Like many companies, we need to control these costs to stay competitive. At the same time, we want to be sure that our health benefits do what they are intended to do, which is to help you and your family achieve and maintain your health potential. Fortunately, good health can actually cost less. Over the long-term, if our health benefits program can help you maintain or improve your health, we all win. That s why we are excited to offer an innovative new plan option called a Health Reimbursement Arrangement (HRA). An HRA is an example of a consumer-driven health plan that is designed to empower you to take control of your health and the dollars you spend on your care. An HRA is an account that accumulates funds to cover your healthcare expenses. It comes with a high-deductible health plan that protects you from large healthcare expenses. HRAs offer you the following advantages: Employer funded. HRAs must be paid solely with employer dollars. Favorable tax treatment. Coverage under an HRA and expenses reimbursed through the HRA are excludable from your gross income. Reduce your out-of-pocket costs. You can use the money in your HRA to pay for eligible medical expenses and prescriptions. The HRA funds you use can help you satisfy your plan s annual deductible. Carry-over of unused coverage. Unused account dollars may be carried over to subsequent coverage periods. The benefits of preventive care, without the cost. Receive 100% coverage for nationally recommended preventive care, with no deduction from your HRA or out-of-pocket costs for you when you see an in-network provider. Retirees may be covered. An HRA may cover both current and former employees, including retirees, and their spouses and tax dependents. You will receive more information about the HRA plan as we get closer to our annual open enrollment period. We are pleased to be able to offer you this exciting new alternative for our employee health benefits plan. Sincerely, [Insert name] [Insert title] HRA Binder - Page 20 of 22

21 Health Reimbursement Arrangement (HRA) How does it benefit you? It is an account funded solely by your employer. You can use the money in this account to pay for qualified medical expenses. Reimbursements may be tax-free if you pay qualified medical expenses. Any unused amounts in the HRA can be carried forward for medical expenses in later years. You will become a wise healthcare consumer. Health Reimbursement Arrangement (HRA) How does it benefit you? It is an account funded solely by your employer. You can use the money in this account to pay for qualified medical expenses. Reimbursements may be tax-free if you pay qualified medical expenses. Any unused amounts in the HRA can be carried forward for medical expenses in later years. You will become a wise healthcare consumer. Health Reimbursement Arrangement (HRA) How does it benefit you? It is an account funded solely by your employer. You can use the money in this account to pay for qualified medical expenses. Reimbursements may be tax-free if you pay qualified medical expenses. Any unused amounts in the HRA can be carried forward for medical expenses in later years. You will become a wise healthcare consumer. HRA Binder - Page 21 of 22

22 HRA Case Study 3 Stan is divorced, and in fairly good health at age 52, but had to have surgery on a bad knee. His employer has allocated $1,000 to his HRA. When Stan had surgery, he incurred x-ray, physician, and therapy charges totaling $8,000. Stan s plan has an individual deductible of $2,000. If he chooses to use his HRA to pay for covered services, this will reduce or eliminate the out-of-pocket amount needed to meet his deductible before traditional health coverage begins. Here is a look at the first 2 years of Stan s HRA plan, assuming the use of in-network providers: Year 1 HRA - $1,000 contribution $1,000 Total Expenses: Prescription Drugs - $150 $700 Office Visits - $200 Preventive Care Services - $350 Paid by preventive care benefit* $300 Amount reimbursed from HRA $400 HRA Rollover to Year 2 $600 Since Stan did not use all of his HRA dollars, he did not need to pay any additional amounts out-of-pocket this year. * If preventive care is covered by the health plan Year 2 HRA Balance: $600 from Year 1, plus $1,000 contribution for Year 2 $1,600 Total Expenses: X-ray, physician, and physical therapy charges $8,000 Plan deductible $2,000 Expense balance remaining after HRA reimbursement $400 Amount paid by Stan out of-pocket $400 HRA Rollover to Year 3 $0 Since Stan carried over a balance of $1,600 from Year 1, he was able to nearly meet his deductible with his HRA dollars. HRA Binder - Page 22 of 22