Health Reimbursement Arrangements (HRAs)

What The Ruling Did

On June 26, 2002, the Treasury Department and the Internal Revenue Service issued guidance that clarifies the tax treatment of health reimbursement arrangements (HRAs) as not taxable.

Background

Proponents of consumer directed options have lobbied the departments for clarification of the tax treatment for new options that allow the carryover of unused funds to later years. Funds may be used under certain circumstances for health insurance premiums, including COBRA and Medigap coverage. Funds would be available to current employees and may also allow access by former employees, including retirees.

The Way It Works

Employers would purchase basic coverage, usually with a high deductible. Employees would be allowed to share in the cost of that coverage, as they do now. They would also deposit employer money into an account that the employee can use for routine medical bills or other items not covered by the high-deductible policy.

Some health policy analysts believe subjecting consumers to the actual cost of care will sharpen their purchasing decisions of health services by changing the relationship between the consumer/patient and the physician. Once consumers begin to control the payment for services, they will be more inclined to shop for services and inquire about the cost of care, which many believe will lead to improved quality of care and increased patient satisfaction.

IRS Guidance states

• Only employer dollars can be used to fund an HRA, and this does not include funds that are considered employer dollars as a result of an election under a Section 125 plan. Funds may roll over from year to year.
• The fund parameters are set by the employer, but may include items allowed under 213(d), or simply cost-sharing for out of pocket expenses not covered by the high-deductible plan, such as deductibles, coinsurance, copays, and other cost-sharing.
• HRAs must be available for COBRA continuation on the same basis as other health plans.
• HRAs may be made available to terminating or retired employees but this is not mandatory.
• Employers may not gross up or bonus terminating employees an amount equivalent to the dollars that remain in their HRA.
• HRAs remain with the originating employer and do not follow an employee to new employment.
• HRAs may coexist with Flexible Spending Accounts and Cafeteria Plans as allowed under Section 125. The notice requires that the HRA be exhausted before the FSA pays. However, an employer may set up their HRA plan document to require FSA exhaustion first.
• The HRA itself may not be tied to any salary reduction or deferred compensation program, although the accompanying insurance plan may be tied to a salary reduction. But the salary reduction may not exceed the actual cost of the insurance plan and may not be pegged to any level of HRA contribution.
• Many of the timing rules of an FSA will not apply to an HRA, so a mid-year enrollment will be allowed, as will reimbursements that cross calendar years or plan years.
  The same non-discrimination rules apply to the HRA as to other health benefit programs.

Additional Resources

The Internal Revenue Service has rejected an effort by employers to help health reimbursement arrangement holders who have no spouses or children. The revenue ruling will take effect for HRA plan designated beneficiary provisions for plan years beginning after Dec. 31, 2008. Summary

IRS Ruling on HRAs 2005-24

Health Account Comparison Chart
CBIZ Benefits & Insurance Services, Inc. chart comparing HSAs, MSAs, HRAs, and FSAs - December 2003

Health Savings Accounts Summary Chart
National Association of Health Underwriters (NAHU) anaysis of Health Savings Accounts (HSAs) - Updated April 19, 2004

IRS Notice on HRAs 2002-451

IRS Ruling on HRAs 2002-411

Treasury and IRS Issue Guidance on Health Reimbursement Arrangements
Treasury Department Press Release - June 26, 2002

Comments on Treasury Guidance from American Benefits Council

H.R. 1 Frees FSAs and HRA's From 1099 Rules
National Underwriter (November 25, 2003)

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