INSURANCE

Health Reimbursement Accounts (HRA) or Health Reimbursement Arrangements are Internal Revenue Service (IRS) - sanctioned programs that allow an employer to reimburse medical expenses paid by participating employees, thus yielding "tax advantages to offset health care costs".

ESTABLISHMENT

HRAs are initiated by the employer and serviced by a third-party administrator or plan service provider. The employer may provide in the HRA plan document that credit balances in an employee's HRA account can be rolled over from year to year like a savings account. The employer decides if the funds are rolled from year to year and how much rolls over (which can be either a flat amount or a percentage).

CONTRIBUTIONS

According to the IRS, an HRA "must be funded solely by an employer," and contributions cannot be paid through a voluntary salary reduction agreement (i.e., a cafeteria plan). There is no limit on the employer's contributions, which are excluded from an employee's income.

DISTRIBUTIONS

According to the IRS, "employees are reimbursed tax free for qualified medical expenses up to a maximum dollar amount for a coverage period". HRAs reimburse only those items (copays, coinsurance, deductibles and services) agreed to by the employer which are not covered by the company's selected standard insurance plan (any health insurance plan, not only high-deductible plans). These arrangements are described in IRS Section 105.

Qualified claims must be described in the HRA plan document at inception, i.e., before reimbursing employees for those medical expenses. Arrangements (medical services, dental services, co-pays, coinsurance, deductibles, participation) may vary from plan to plan, and an employer may have multiple plans in place, allowing much flexibility.

The employer is not required to prepay into a fund for reimbursements, instead, the employer reimburses employee claims as they occur.

Reimbursements under an HRA can be made to the following persons:

• Current andformer employees.
• Spouses and dependents of those employees.
• Any person the employee could have claimed as a dependent on the employee's return except that:
• The person filed a joint return.
• The person had gross income of $3,400 or more.
• The employee, or his/her spouse if filing jointly, could be claimed as a dependent on someone else's 2007 return.
• Spouses and dependents of deceased employees.

Advantages of HRAs for employers include:

• Reimbursements of qualified claims are tax-deductible for the employer.
• HRAs offer employers "the most flexibility of all health care accounts" in that "employers can choose the types of expenses eligible for reimbursement, whether to permit the carry-over of unused amounts to future years and whether the accounts will be funded or notional".

Advantages of HRAs for employees include:

• Contributions that employers make can be excluded from employees' gross income.
• Reimbursements may be tax free if the employee pays qualified medical expenses.
• Unused funds in the HRA can rolled into future years for reimbursement.
• HRAs may be offered in conjunction with other employer-provided health benefits including Flexible Spending Accounts (FSAs).
• Employees do not have to be covered under any other health care plan to participate, unlike (for example) a Health Savings Account (HSA) which requires a High Deductible Health Plan.

A frequent complaint regarding HRA arrangements is that they are extremely opaque in regards to their requirements. HRAs must follow "a variety of statutory rules and provisions" including the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) continuation coverage requirements, the Employee Retirement Income Security Act (ERISA), and the Health Insurance Portability and Accountability Act (HIPAA). Rules pertaining to their reimbursements are perceived by member participants to be somewhat contradictory and/or even incoherent - leading some to lose contributions which are intended for healthcare but are learned (after the procedure or laboratory test) to be disallowed.

Limitations of HRAs include:

• Self-employed persons are ineligible.
• "Highly compensated" participants may be subject to "certain limitations".

An HRA plan has three parts:

1. Set yearly amount given by the employer (for example could be $500 or $1000). This is money the employee can spend completely, no deductible.
2. Bridge amount (for example could be $500 or $1000). This is money the employee has to pay out of pocket.
3. Traditional insurance plan. Typically those amounts will be $500, $500 and 90% respectively.

Thus the employee can use the first $500 and pay nothing out of pocket, then spend the next $500 completely out of pocket, then be covered by the traditional insurance plan. If the first $500 is unused at the end of the year it is then rolled over to next year.

For example, Willy who works for a HRA-providing employer will only use about $200 for the first year. Next year he will have $800 in his HRA account.

First year HRA account (Employer Contrib): $500
First Year Spent: $200
First year rollover to next year: $300

Second year HRA contribution: $500
Second year HRA toward bridge: $300
Second year HRA Account: $800 ($500 employer Contrib + $300 rollover from last year)
Second year spending: $14000 (major surgery, let's say)
Second yr Bridge paid by Willy: $200 (now the first part and second part have been exhausted, the coverage kicks in)
Second year paid by traditional coverage: $12000 (Coverage might pay only 90% or 100%, Willy would have to pay the difference here)