The philosophy behind the implementation of Health Reimbursement Arrangements (HRA'S) is to give employees more choices in how they spend their benefit dollars. Also, the fact that the plan may permit (by employer design) a rollover feature for unused balances to a following plan year may actually encourage employees to be more cost conscious regarding their health care costs.
HRA's are funded solely by the EMPLOYER – there can be no element of employee salary deduction/reduction or funding from an Flexible Spending Account. The contributions are not considered taxable income to the employees (IRC Section 105) however, the contributions are tax deductible for the Employer sponsoring the plan.
What benefits can an Employer include in an HRA Plan?
- Medical expenses not covered by insurance — These are typically the same type of expenses that are allowable through a Flexible Spending Account. Qualified Medical Expenses
- Insurance Premiums — Health insurance provided by the employer, individually-owned policy premiums or long-term care insurance premiums may be paid from the HRA plan.
The Benefits of an HRA:
- Flexibility in plan design
- Ability to "roll over" unused money from one plan year to the next
- No "use it or lose it" rule
- Reimbursement for premiums for health insurance
- Reimbursement for medical expenses does not have to be within the covered plan year. (For example, if an employee was a participant in the HRA in 2002 and 2003, they could submit a claim for an expense incurred in 2002 in the 2003 plan year).
- Compliments a Flexible Spending Account Plan – An employer can offer both plans to their employees
- Former employees, including retirees (by plan design) can have continued access to their unused funds.
How do I implement an HRA?There are a few items that will need your consideration before implementing an HRA. You will need to determine the following:
- The Employer Contribution
- Optional features you will want to offer
- Whether funds roll from year to year
- How to handle terminated employees and retirees
- Which pays first, the FSA or the HRA (if the employer sponsors both plans)