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The Five Ws and One H of Health Reimbursement Arrangement (HRAs)*

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This is the third article in our Compliance 101 blog series where we use six questions to break down key compliance terms. Below you will learn more about a Health Reimbursement Arrangement, or HRA.

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Who may participate in an HRA?   

  • HRAs are only available to common law employees (or former employees).
  • Self-employed individuals, partners in a partnership, and more than 2% shareholders in an S corporation are ineligible to participate on a tax-favored basis.
  • Employers generally may design their HRA to be available to only a specific population within their workforce (e.g. hourly employees) if the restrictions do not favor highly compensated individuals.
  • HRAs may be structured to reimburse qualified 213(d) medical expenses of an employee’s spouse and tax dependents, including children under the age of 27 as of the end of the taxable year.  (Domestic partners who are not a tax dependent under federal tax law are not eligible.)

What is the definition of an HRA?

  • An HRA is an arrangement that:
    • is paid for solely by the employer and not provided pursuant to salary reduction election or otherwise under a § 125 cafeteria plan;
    • reimburses the employee for § 213(d) medical care incurred by the employee and the employee’s spouse and dependents; and
    • is generally considered to be a self-funded group health plan within the meaning of ERISA, the Public Health Service Act (PHS Act) and is subject to the rules applicable to traditional major medical plans (e.g. ERISA, COBRA, HIPAA).

Why would an employer offer an HRA?

  • Help employees lower their out of pocket costs (e.g. copayments, deductibles).
  • May be offered with any type of health coverage, it does not need to be a high deductible health plan (HDHP).
  • Provides a tax advantage to the employer (contributions are tax deductible).
  • Contributions are not included in an employee’s income.
  • Reimbursements to the employee are tax free.
  • Unused balances generally default to the employer.
  • Employers decide how much to contribute & when:       
    • There is no statutory annual limit for a traditional HRA (i.e. an HRA integrated with the group health plan),  Individual Coverage HRA (ICHRA), and retiree-only HRA, therefore the amount an employer can contribute during the coverage period is determined by the employer.
    • The annual limit for an Excepted Benefit HRA (EBHRA) is $1,800 (for 2020) – indexed annually for inflation
    • The annual limit for a Qualified small employer HRA (QSEHRA) is $5,250 for self only coverage, $10,600 for family coverage (for 2020) – indexed annually for inflation. *

Where do employers run into the most compliance issues with HRAs?

  • ACA
    • The Affordable Care Act requires that a Summary of Benefits and Coverage (SBC) describing the HRA benefits be provided to all plan participants for most HRAs. In general, this should be included in the group health plan SBC but there is no one size fits all approach.
    • PCORI fees must be paid before July 31st: 
      • If the plan sponsor also maintains a self-funded medical plan with the same plan year, the medical plan and HRA may be treated as one plan for purposes of the PCORI fee.
      • If the medical plan is fully-insured, the medical plan and HRA must be treated as separate plans for purposes of the PCORI fee with the insurer paying the fee for the medical plan and the employer/plan sponsor paying the fee for the HRA.
    • Traditional HRAs must be integrated with a group health plan and only available to employee’s covered by the group health plan to comply with market reforms.
  • COBRA
    • In general, when an HRA is integrated with the group health plan of an employer subject to COBRA, when the participant loses coverage due to a COBRA qualifying event (e.g. termination of employment) the participant must be provided the opportunity to continue the group health plan and the HRA.
  • ERISA
    • Requires a plan document and summary plan description
    • Annual Form 5500, unless a regulatory exemption applies
  • Health Insurance Portability and Accountability (HIPAA)
    • Employers offering an HRA must have HIPAA privacy policies & procedures in place with rules to safeguard protected health information (PHI).

When may it be challenging to offer an HRA?

  • Employers who offer a High Deducible Heath Plan (HDHP)  
    • A general purpose HRA impacts HSA eligibility (i.e. an employee is ineligible for HSA contributions)
  • Employers who offer a health FSA
    • A medical care expense may not be reimbursed from a health FSA if the expense has been reimbursed or is reimbursable under the HRA.
    • If coverage is provided under both an HRA and health FSA for the same medical care expenses, amounts available under an HRA must be exhausted before reimbursements may be made from the health FSA.
    • However, before the health FSA plan year begins, the plan document for the HRA may specify that coverage for the HRA is available only after expenses exceeding the dollar amount of the FSA have been paid.

How are COBRA premiums determined?   

  • If a qualifying event occurs, each qualified beneficiary has a separate and independent right to elect HRA COBRA coverage. If an individual elects COBRA, the maximum amount of the HRA available for the individual at the time of the COBRA qualifying event must be made available under continuation coverage. Likewise, the HRA amount must be increased at the same time and by the same increment that it is increased for similarly situated non-COBRA beneficiaries (and by decreasing it for claims reimbursed). Premiums are determined under the existing rules in § 4980B. (See our previous blog: The Five Ws, and One H of COBRA  How much can group health plans charge for COBRA?)
  • Employer may charge two COBRA premiums: 1) for the HRA 2) for the medical plan and allow COBRA for each to be elected separately, or they may require the HRA and the insured coverage to be elected together.
  • Information letter 2017-0027 provides IRS guidance that the COBRA applicable premium under an HRA may not be based on a qualified beneficiary’s reimbursement amounts available from the HRA. (e.g. the COBRA rate is not dependent on the balance of the participants HRA and must be determined prior to the 12-month determination period.
  • The IRS has not issued specific guidance on how to determine the applicable premium, only that the cost of COBRA premium HRA may be determined in one of two ways:
    1. Past Cost Method – The rate is determined based on past year's HRA claims history, plus the 2% admin fee. This reflects the cost to the employer of administering the HRA. It is "blended" so it is the same for all HRA qualified beneficiaries regardless of their account balance.
      • For example, if the annual funding is $1,200 but employees only use $600 on average, the monthly COBRA premium is $50 + 2% admin fee.
    2. Actuarial Method –A reasonable estimate of the cost to the employer of administering the HRA is determined on an actuarial basis, generally based on utilization trends, when the past cost method cannot be used (e.g. a brand new HRA and no history, significant changes to the HRA coverage limits).
      • For example, if it is estimated based on the facts and circumstances that on average employees who participate in the HRA will spend 75% of the available $2,000 HRA, or $1,500, the monthly COBRA premium is $125 + 2% admin fee.

NOTE: The IRS has not defined a 'safe harbor' nor max utilization % in the regulations. Rather a reasonable determination must be made based on the facts (e.g. annual limit, type of expenses it covers, and whether it is a traditional or post-deductible HRA)

*As of the publish date of this article, there are 6 different types of HRAs available, each with various requirements and plan design options beyond the scope of this article.  

  1. Traditional HRAs integrated with group health plans

  2. Limited Purpose HRAs – only pay excepted benefits (e.g. limited scope dental, vision coverage),

  3. Retiree-only HRAs – pays for medical expenses after retirement

  4. Qualified Small Employer HRAs (QSEHRAs) – available to employers with less than 50 full-time employees who do not offer a group health plan

  5. Excepted Benefit HRAs (EBHRAs) – for employers of any size who offer a group health plan

  6. Individual Coverage HRAs (ICRAs) – for employers of any size who do not offer a group health plan to the same class of employees

Disclaimer: This blog was written by Michelle Turner, MBA, Compliance Consultant, Alera Group Central Region. This blog post intends to provide general information regarding the status of, and/or potential concerns related to, current employer HR & benefits issues. This blog should not be construed as, nor is it intended to provide, legal advice. The opinions expressed herein are based upon the author’s experience as a Compliance Consultant and may not reflect the opinions of your counsel.

The information contained herein should be understood to be general insurance brokerage information only and does not constitute advice for any particular situation or fact pattern and cannot be relied upon as such. Statements concerning financial, regulatory or legal matters are based on general observations as an insurance broker and may not be relied upon as financial, regulatory or legal advice. This document is owned by Alera Group, Inc., and its contents may not be reproduced, in whole or in part, without the written permission of Alera Group, Inc.

This article was last reviewed and up to date as of 08/17/2020