HRA-Health Reimbursement Arrangement Plans

The IRS describes an HRA as an arrangement that:

1) Is paid for solely by the employer and not a salary reduction election.

2) Reimburses the employee for IRS acceptable medical care expenses of the employee and dependants. Reimbursements are generally not taxable to the employee as ordinary income.

3) Provides reimbursements up to a maximum amount for a coverage period and unused amounts are carried forward to increase the maximum amount in future periods.

4) May reimburse employees for the purchase of health insurance.

Why is this an important ruling?

For the first time we can design medical plans that give tax incentives to encourage employees to make better health care buying decisions. The HRA can significantly reduce current benefit cost.

Basic HRA

With the basic HRA the current deductible and/or coinsurance is increased. This plan change will lower premiums. The savings in premium is used to provide a fund for each employee’s HRA fund.

Carry-Over Feature

One of the most significant features of an HRA is the unused portion of each employees HRA fund. Regulations permit a wide array of choices.

Carry-over 100% of any unused amount with the employer providing the full amount for the next year. Example: HRA fund $500, employee used $200; employee carries over $300 and the employer provides $500 for a total usable fund amount of $800.

Carry-over 100% of any unused amount with the employer providing an additional amount to complete the fund for the next year. Example: HRA fund $500, employee uses $200; employee carries over $300 and the employer provides $200 for a total usable fund amount of $500.

By allowing an employee carry-over unused amounts, the employee realizes the importance of making good health care decisions. If the employee continues to have his fund grow, he may choose to select a higher deductible, thus reducing both the employee’s and the employer’s fixed premium cost.

Reduce Current Premium

Many small employers are to the point of having to choose between having a group health insurance plan and staying in business. Employers are canceling their group plans because they can no longer afford them. It is not uncommon to find that an employer can reduce the premium so much by raising the deductible and coinsurance that he can still provide an HRA for the employees and still save. Remember that the HRA is only an expense when there is a valid unreimbursed medical expense paid.