Health Reimbursement Arrangements (HRAs)

Frequently Asked Questions

 

General HRA Design

Q: Is there any requirement that the insured or self-insured health plan accompanying an HRA be a high deductible or catastrophic plan?

A. No, HRAs can be independent of a medical plan, or the employer may require employees to participate in a combination of an HRA and a medical plan. If combined, there are no rules regarding the particular type of plan that accompanies the HRA.

Q. Can an employer require an employee to participate in health insurance coverage to receive an HRA?

A. Yes, an employer can require an employee to participate in health insurance in order to receive the HRA. However, keep in mind that there may be adverse selection concerns if the HRA is offered to only one of several medical options. For example: Option A: $250/$500 deductible: Option B: $500/$750 deductible; Option C: $1000/$1250 deductible with $500 employer contributions though HRA.

Q. Is an employer required to rollover the entire amount of unused annual employer contribution to an HRA, or may the employer limit or cap the amount of credit that may be carried over from year to year (for example, allow employees to carry over only ½ of the maximum annual employer contribution)?

A. A cap on the portion that could roll over to the next year is permissible. Also an employer may specify a certain number of dollars that could not carry over to the next year to encourage the use of these funds for preventative care. An HRA may also be designed not to allow funds to roll over.

Eligibility

 

Q. Can an HRA be offered only to retirees?

A. Yes

Q. What are the owner eligibility rules with respect to an HRA?

A. HRAs are not available to self-employed individuals, partners in a partnership, 2% or more owners of an S Corp. along with the employed spouse, children, grandchildren and parents of a more than 2% shareholder, and outside directors, limited partners, and member in an LLC.

Q. Can an HRA cover domestic partners?

A. Only if the employer verifies that the domestic partner qualifies as a dependent. A dependent if either a relative who receives over half of his or her support from the participant, or a non-relative who is a member of the participants household for the year and who receives over half of his or her support from the participant.

Annual credits/Contributions

 

Q. Are there any restrictions on the amount an employer can contribute to an HRA?

A. No, there are no dollar limits on the amount the employer can credit to the HRA. But keep in mind that unused funds will rollover into the next plan year for the employee – unlike the health FSA where unused funds are forfeited and returned to the employer.

Q. Does an employee have immediate access to the annual amount (uniform coverage) or is it accessible as it is paid into the account?

A. An employer can set the HRA up however it desires. The employer could do monthly credits and say that the balance can only be used as it accrues.

Access to an HRA after Certain Events

 

Q. What happens when an employee retires and has amounts left in the HRA?

A. Depending upon how the plan is designed, a retiree may be required to forfeit all funds or the employer may offer to maintain these funds during the course of the employee’s retirement.

Q. What happens to unused funds when an employee leaves an employer?

A. Depending upon how the plain is designed, the employee may be required to forfeit the HRA balance, or the employer may continue to reimburse qualifying health expenses incurred after the termination date.

HRAs and Cafeteria Plans

Q. Will employees be permitted to pay for their portion of the group health insurance premiums from their HRAs, as opposed to employees paying premiums pre-tax via salary reduction?

A. Premiums that may be paid by salary reduction may not be paid from an HRA.

HRA/FSA Ordering

Q. Can claims automatically move first to the HRA and then to the FSA or vice versa, depending on the plan structure?

A. It depends upon what the HRA document provides. It can provide that the FSA has to be exhausted before you reimburse from the HRA, or it can provide that the HRA pays first.

Q. Could you structure the HRA/FSA interaction so that expenses that are covered (but not fully paid) by the medical plan are payable by the HRA, and only expenses that are not covered by the medical plan are payable by the FSA?

A. Yes. You can also vary this approach so that the FSA could begin paying expenses covered by the medical plan once the HRA is exhausted.

COBRA

Q. Does a plan administrator have to give a separate COBRA election for an HRA or can the plan administrator take the position that only one COBRA election is warranted for both an HRA and a high deductible insurance policy to which it is related?

A. The rule is that whatever you do for active employees is what you do for qualified beneficiaries. So if an active employee is required to take both, the COBRA qualified beneficiary could be required to take both.

Q. Could a plan permit an employee to spend down the HRA instead of electing COBRA?

A. The employee may spend down the HRA, but you still have to give the employee the option of electing COBRA.

Q. Does the limited COBRA obligation apply to HRAs?

A. No. The COBRA obligation for HRAs will always be 18/36 months. The limited COBRA obligation allows certain health FSAs to offer COBRA only through the end of the plan year if the employee has a positive balance upon termination. (Health FSAs subject to limited COBRA include those with only employee contributions and those that offer employer contributions of less than $500.)

Nondiscrimination

Q. Can the employer’s annual deposit to an HRA be based wholly or in part on age, service, or employee job performance?

A. No. These categories would risk violation of Section 105(h)’s nondiscriminatory benefit rule.

 

Reporting

Q. What federal plan filings or reporting would be required for an HRA?

A. For an unfunded HRA (i.e., the kind of HRA that was the primary focus of the IRS guidance), DOL regulations provide an exemption from having to file a Form 5500 in the case of an ERISA welfare benefit plan, such as a health plan, that has fewer than 100 participants as of the beginning of the plan year. Unfunded means that participant contributions are not segregated from the employer’s general assets. On the other hand, this exemption is not available to a funded HRA (one that requires a trust). Therefore, a small unfunded HRA can be exempt from Form 5500 filing requirements, while filing requirements would apply to larger HRAs (100 or more participants) and funded HRAs, unless the arrangements are not subject to the ERISA (e.g., in the case of government plans.)