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A Health Reimbursement Arrangement (HRA) allows employers to reimburse employees for specified medical expenses using corporate funds. HRAs can serve as a substitute or supplement to health insurance, addressing out-of-pocket costs not covered by traditional plans. Ideal for closely held corporations or professional practices, HRAs must comply with IRS regulations to ensure benefits are tax-free. Key design features include specifying covered employees and expenses, while adhering to nondiscrimination rules to maintain eligibility for tax benefits. Understanding HRA functionality can enhance employee wellness programs and tax efficiency.
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What is it? Employer reimburses covered employees for specified medical expenses directly from corporate funds HRA is used • as a substitute for health insurance • as a supplement to provide payments for medical expenses not covered under company’s health insurance plan • to pay for medical expenses in excess of company’s health insurance plan
When is it Indicated? • Closely held corporation and shareholders and family are primary or only employees • In professional corporation where only employee is high income professional or where are few other employees • Employer would like to provide employees with medical benefits beyond basic medical
Design Features • Plan adopted by corporate resolution specifies • group of employees covered • types of medical expenses that will be reimbursed • any limits or conditions or payment by the company • Employer reimburses employee for claims covered under plan
Design Features • Benefits tax-free if • qualify for medical expenses under IRS code • plan is nondiscriminatory • Broad range qualified medical expenses • Plan can be fully funded or insured • Insurance contracts provide (1) administrative services, (2) claims evaluation, (3) stop loss coverage
Tax Implications • Employer may deduct 100% of • cost of benefits paid to employees under plan • plan administrative expenses • cost of any insured stop loss coverage • Annual employer deductions are limited • Benefits tax-free unless plan is discriminatory • Employee eligible for itemized medical expense deduction; limited to amount by which total of all eligible medical expenses exceed 7.5% of taxpayer’s adjusted gross income
Tax Implications: Nondiscrimination Rules If fail nondiscrimination tests, benefits taxable to highly compensated employees Two tests • coverage • benefits
Tax Implications: Nondiscrimination Rules Coverage test – plan must benefit • 70% or more of all employees • 80% or more of all employees who are eligible to participate in the plan if at least 70% of all employees are eligible to participate OR • a classification of employees, established by employer, that does not discriminate in favor of highly compensated employees
Tax Implications: Nondiscrimination Rules Who can be excluded from coverage tests? • employees with less than 3 years of service • employees under age 25 • part-time or seasonal employees • employees in a collective bargaining unit if have good faith bargaining on health plan issues • nonresident alien employees who received no U.S. income
Tax Implications: Nondiscrimination Rules Benefits test All benefits provided for highly compensated employees under the plan must be provided for all plan participants
Tax Implications: Nondiscrimination Rules Who can be excluded? • Employees with less than 3 years of service • Employees under age 25 • Part-time or seasonal employees • Employees in collective bargaining unit having good faith bargaining on health plan issue • Nonresident alien employees who received no U.S. income
Internal Revenue CodeEligibility and Coverage Requirements HRAs must comply with requirements for group health insurance regarding: • limits on exclusions for preexisting conditions • conditions for which participants cannot be excluded or charged a higher premium • length of hospital stay for childbirth • benefit limits for mental illness
Internal Revenue CodeEligibility and Coverage Requirements Penalty for noncompliance is same as COBRA, usually $100 per day for each individual up to a total of the lesser of • 10% of the employer’s payments under group health plans for the previous year or • $500,000
COBRA Continuation Coverage Under COBRA, an employer must provide option to continue an employee’s existing health plan coverage (incl. dependent coverage) for 36 months after various qualifying events • death or divorce of employee • employee eligible for Medicare • bankruptcy • child ceases to be dependent for plan purposes
COBRA Continuation Coverage Health plan coverage must continue for • 18 months if terminate employment (except for gross misconduct) or reduce employment hours • 29 months if termination is for disability
COBRA Continuation Coverage Continuation coverage can terminate before the 36, 29, or 18 month period if • employer terminates health plan for all employees • beneficiary does not pay own share of premium • beneficiary covered under another health plan, unless a preexisting condition is excluded
COBRA Continuation Coverage Former employee’s or beneficiary’s share of premium under COBRA cannot be more than • 102% of premium paid by those without qualifying event • 150% of premium after 18th month of continuation coverage for disabled Fine for noncompliance is $100 per day
ERISA Requirements An employer’s HRA is a welfare benefit plan under ERISA and subject to ERISA requirements
Discussion Questions • Can an HRA be designed to exclude rank-and-file employees by funding the HRA though a health insurance contract? • What are the advantages and disadvantages of designing an HRA that discriminates by covering only specific executives?
