Health Reimbersement Arrangements Administration
Health Reimbursement Arrangements (HRA) Administration
How is an HRA different from the more common cafeteria plan, also known as a FSA (Flexible Spending Account)?
An HRA is a medical reimbursement plan that is paid for solely by the employer and not funded through salary reduction elections of the employee. When establishing the HRA (and then on an annual basis), the employer determines the maximum medical deduction amount per employee. Each employee receives the same amount.
Under an HRA plan, the employer reimburses the employee for qualified medical care expenses. The HRA provides reimbursement up to the maximum dollar amount established by the business for the coverage period and any unused portion is carried forward to the next coverage period.
HRA reimbursements are provided to current as well as former employees (including retired and terminated employees), their spouses and dependents and the spouses and dependents of deceased employees.
An HRA and an FSA are similar in that they both reimburse the employee for qualifying medical expenses, which are excluded from income (meaning no withholding, Social Security or Medicare taxes are calculated on the qualifying amount). They both reimburse the employee with substantiated proof of a qualified medical expense. And they both cover expenses of the employee, their spouse and dependents.
In an FSA plan, the employee identifies the amount of qualified medical expenses they plan to incur during the next coverage period. This anticipated amount is divided by the total number of pay periods during the coverage period. The net amount is subtracted from the employee's gross wages for the pay period and taxes are calculated on the remaining figure. The employee provides proof of the qualified medical expense and is then reimbursed for that medical expense amount. If the employee is not able to use the total amount they anticipated to spend during the coverage period, they lose the remaining funds.
In an HRA plan, the employer determines the qualified medical expense amount per coverage period. The employee provides proof of the qualified medical expense and is reimbursed for the expense up to the maximum amount the employer designated.
What happens if an employee doesn't have enough medical expenses?
This new reimbursement program allows the unused portion of the maximum dollar amount to be excludable from the employee's gross income and carried over from year to year. The unused portion is maintained for the employee with the employer, in contrast to the "use-it-or-lose-it" rules applying to the FSA's under cafeteria plans.
What happens if an employee quits or is terminated?
A business with an HRA plan must continue to reimburse former employees or retired employees (their spouses and their dependents) for qualified medical care expenses after termination of employment or retirement (even if the employee does not elect COBRA continuation coverage) until the outstanding funds are used. An employer may establish a plan provision that includes an administrative fee under these conditions.
What are 'qualified medical expenses' under the HRA plan?
An HRA may provide benefits that reimburse expenses for medical care as defined in IRS code 213(d). Included in the coverage are amounts paid for premiums for accident or health coverage for current employees, retirees and COBRA qualified beneficiaries. Each medical care expense submitted for reimbursement must be substantiated. The new IRS ruling states that coverage under an HRA does not apply to expenses claimed as medical expense deductions in a prior tax year or expenses incurred prior to enrollment in the HRA or incurred before the date the HRA existed.
Can a business offer both the HRA and the FSA?
Under the new IRS ruling, an employer may offer both the new Health Reimbursement Arrangement (HRA) health plan, and the Flexible Spending Account (FSA) health plan. If an employee has elected to participate in the FSA through salary deduction as well as having his/her employer offer the HRA, then certain "order" rules apply as to which plan should be used.
If a qualified medical care expense has been reimbursed or is reimbursable under any other accident or health plan, the expense may not be reimbursed from an FSA or HRA plan. If coverage is provided under both an HRA and an FSA for the same medical care expenses, amounts available under an HRA must be exhausted before reimbursements may be made from the FSA. However, if a medical expense is not covered under an HRA, then a reimbursement from an FSA for the medical expense will not violate this rule.
Under no circumstance may an employee be reimbursed for a medical expense by both an FSA and an HRA. However, consistent with the above "order" rule, before an FSA plan year begins, the plan document for the HRA may specify that coverage under the HRA is available only after expenses exceeding the dollar amount of the FSA have been paid.
We strongly urge you to get professional assistance to determine which medical health plan would benefit your business. If you have questions regarding HRA's, FSA's or other related questions, please contact us.
American Benefit Services offers the following services to all clients for the administration of Health Reimbursement Arrangement Accounts.
• Expert plan design, including Summary Plan Description
• Coordination with other benefits, including high deductible plans and FSAs
• Critical nondiscrimination testing
• Claims processing & monthly reimbursement
• Year-to-date reports to employer
• 24/7 web-based participant account information
• IRS Form 5500 preparation, if needed
• Claims processed daily, with checks dispersed daily