What are some rules to be aware of with HRAs?


Health reimbursement arrangements (HRAs) allow a tax-advantaged way for an employer to reimburse an employee’s or dependent’s qualified medical expenses. They are an excellent tool to save on health plan costs while giving a financial benefit to employees that need it. However, there are numerous compliance obligations to consider before implementing an HRA: An HRA is an employer sponsored medical reimbursement arrangement that is tax-advantaged under Section 105. An HRA must be 100% funded by the employer and cannot accept pre-tax salary reductions from employees.  Self-employed individuals such as sole proprietors, partners, and more than 2% S-corp owners are not eligible to participate. However, C-corp executives and employees would likely be eligible, as long as the arrangement passes nondiscrimination testing.

An HRA must be “integrated” with an employer’s major medical plan, unless it qualifies for an Individual coverage HRA or a Qualified Small Employer HRA. “Integrated” here means that the employer must offer a major medical plan to any HRA eligible employees; any HRA participants are enrolled in the employer’s group health plan or another employer’s group plan (such as a spouse’s plan); and the employees are given the chance to waive the HRA. In addition, HRAs may only reimburse 213(d) medical care expenses and each claim must be substantiated. The rules say that if the employer or administrator receives an EOB from an independent third party (such as the insurance carrier) that lists the date of claim and the employee's responsibility for that service (i.e., coinsurance payments and amounts paid toward the deductible), and the employee certifies that he or she will not seek reimbursement from any other plan covering health benefits, then the claim is considered fully substantiated, with no need for the submission of a receipt or further review. Lastly, it’s important to remember that an HRA is considered a self-insured health plan subject to ERISA and COBRA, and is also subject to Section 105 nondiscrimination rules (which prohibit favoring individuals considered highly-compensated). So an employer sponsoring an HRA will have ERISA obligations (written plan document, SPD, Form 5500, etc), COBRA requirements, and nondiscrimination testing to perform to make sure the plan isn’t discriminatory. An HRA that reimburses expenses before the statutory deductible is met would also make someone ineligible to contribute to an HSA. In other words, a general purpose HRA is considered disqualifying coverage for purposes of HSA-eligibility. Thus, if an employer decides to offer reimbursement through an HRA, it is best to use a knowledgeable vendor to administer the plan in a compliant manner, and ensure that ERISA and nondiscrimination testing obligations are fulfilled.

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