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Health Reimbursement Arrangements (HRAs)

The introduction of Health Reimbursement Arrangements (HRAs) has provided a
unique opportunity for a company to meet the healthcare needs of their employees
while satisfying corporate financial objectives.  An HRA is an employer-funded account
used to reimburse employees for qualified medical-related expenses on a non-taxable
basis.  HRAs were issued under Treasury and IRS Notice 2002-45 and Revenue
Ruling 2002-41.

This employer-funded arrangement can help the company mitigate the rising cost of
health care by combining innovative plan design with the proven reimbursement
process.  As an example, a company could increase their existing $ 500.00 deductible
plan to $ 1,000.00 per covered employee.  This adjustment will result in an appreciable
decrease in their group medical plan cost.  By using an HRA, they can then cover the
additional $ 500.00 in deductible cost for their employee.  This in essence does not
change the employee’s real cost.  Since deductibles rarely come into play, except for in-
patient or outpatient procedures, the amount saved in premiums and taxes will more
than offset the additional $ 500.00 employer cost.  

The key benefits include:
  • Opportunity to achieve significant savings on your group medical premiums with
    negatively affecting employee morale;
  • Reimbursements qualify as a business expense for the employer;
  • Keeps healthcare affordable for your employees by offsetting additional out-of-
    pocket expenses;
  • The reimbursement is tax free for your employees; and
  • Tax deduction for dollars put into the employee’s HRA accounts.

Did you know that an HRA could easily save your firm tens of thousands of dollars on
your company's health premiums without having to drastically impact employees?
An HRA is a Defined Contribution health care vehicle, also called a defined contribution
(DC) health plan. It is solely an employer-funded vehicle. HRAs cannot be funded by
employee dollars.

These plans became popular after the 2002 IRS guidance which essentially created
the vehicle we now know as an HRA. DC health plans and consumer-driven health care
have been adopted by numerous employer eager to control cost increases for group
heath care.

An HRA is a Group Health and Welfare Plan and subject to several legal requirements.
A Plan Document is required and all eligible employees must receive an SPD. HRAs
are subject to the nondiscrimination rules of Code § 105(h).

HRAs can be designed as stand alone benefit or coupled with a health plan. Employers
will find HRAs much more flexible than HSAs due to restrictive HSA rules.
KCI does NOT sell health insurance. We are a Third Party Administrator comprised of
knowledgeable consultants. We will work with your current health agent or the provider
of your choice. Our services include the drafting of an HRA document and Summary
Plan Description, enrollment and claim forms, and administration of your plan. In other
words, we will do most of the work for you and allow you to enjoy the savings.

          IRS Guidance Regarding HRAs

On June 26, the IRS issued a Notice and a Revenue Ruling on the tax treatment of
Health Reimbursement Arrangements (HRAs). Newly named by the IRS, the HRA can
be offered by an employer as a stand-alone arrangement or as part of a consumer-
driven health plan or defined contribution health plan.In a consumer-driven health plan,
an HRA is typically offered in conjunction with a high-deductible medical plan, along
with a web-based information program. The IRS has taken a liberal view of these
arrangements, holding that the cafeteria plan rules (section 125 of the Internal Revenue
Code) do not apply to HRAs.

Before this guidance, employers had been tentative about offering such arrangements,
uncertain of IRS approval. Some employers, applying the basic principles of sections
105 and 106 of the IRC, offered HRA-type arrangements as retiree medical plans.
However, a 1989 proposed IRS regulation relating to cafeteria plans discouraged some
employers from expanding these arrangements to active employees. The proposed
regulation stated that the principles set out in the cafeteria plan regulations for health
Flexible Spending Arrangements (FSAs) apply whether or not the arrangement is part of
a cafeteria plan - which could mean considering an HRA to be a health FSA. It was
unclear whether the "use it or lose it," the 12-month period of coverage or other health
FSA rules would apply to an HRA. This new guidance clarifies that such principles do
not apply to an HRA and opens up a realm of possibilities for employers.