HRAs are intended to encourage the efficient use of employer-provided health care by fixing employer contributions at a certain projected cost level rather than promising a specific benefit regardless of cost.
In June 2002, the IRS provided safe harbor guidance for employer-funded health reimbursement arrangements that permit participants to carryover unused amounts into subsequent years.
This arrangement may be offered with a tax-favored basis. To accomplish this requirement, the following must be applied:
- HRAs must be solely funded by the employer.
- No premiums may be charged to the employees for the HRA.
- HRAs can only reimburse substantiated medical care expenses incurred by employees or former employees.
- Unused amounts cannot be cashed out. However, they may be rolled forward into the next Plan Year. A terminated employee may be allowed to ‘Spend Down’ their account after termination, based on the plan design. COBRA may also apply.
Types of HRAs
- Integrated HRA and HDHC – Employer typically has a major medical plan with a high deductible. Typically a set annual amount is provided for out-of-pocket expenses. Unused amounts can be carried forward from year-to-year.
- Excepted Benefits HRAs – Plan design is unlimited. Annual benefits can be accrued monthly or be credited to the employee once a year. An HRA is not required to have a carryover. Carryovers may also be capped. HRAs can be designed to require FSA participation. They can also be designed so the HRA pays after the FSA. HRAs can specify which types of medical expenses are eligible and can be comprehensive or very limited.
COBRA does apply. Upon termination, an employee can elect to continue the HRA for a premium. ‘Spend Down’ options can be offered to eliminate the COBRA election. Other COBRA issues can be addressed in the Plan Document.