Health Reimbursement Arrangement/Account (HRA)
HRA plans, authorized for use by the Internal Revenue Service in August of 2002, are employer-funded medical reimbursement plans that allows both employees and employers to save on the cost of healthcare. It is one of the most flexible and effective tools available to employers to stem the rising cost of health insurance, making it very attractive to most employers. Based on the plan design, HRAs can generate significant savings in overall health benefits. HRAs may be designed in many fashions to suit the specific needs of the employer and employees.
An HRA plan allows an employer to subsidize the cost of certain out-of-pocket expenses by setting aside a specific amount of pre-tax dollars for employees to pay for health care expenses on an annual basis
Plan Design
The first step toward implementation of an HRA is to modify the benefit plan to include additional out-of-pocket expenses, such as higher co-payments, deductibles or coinsurance. These changes result in lower premiums. The employer then decides which benefits to subsidize. The end result is the reduction in the employer’s premium expense is greater than the potential cost of the HRA.
There are Three Basic Ways for the Employer to Contribute to the HRA:
- Split Deductible – the
employee is responsible for the first portion of the deductible, with the
HRA kicking in at a pre-determined point to fund the rest of the deductible.
- Refill Model – employees are given a pre-determined amount of
money that can be spent only on the types of out-of-pocket expenses specified
by the employer via Healthy Dollars. At the end of the plan year, any unused
benefits are forfeited, and the employer decides what amount to allow for
the upcoming benefit year.
- Rollover Model – any unused benefits rollover to the next benefit year. The employer can pre-determine exactly what amount of benefit is eligible for the rollover.
Plan Administration
As a value-added service to you, Healthy Dollars has a strategic partnership with one of the finest third party administrators in America, offering you the following benefits:
- Employer does not need to pre-fund the plan. Funds may be put into the plan on an annual, quarterly or monthly basis.
- Health related expenses are paid with our debit card at doctor’s offices, pharmacies, etc. for co-pays, deductibles or any other expense that is part of the employer plan.
What are the non-discrimination requirements of HRA plans?
HRAs are subject to the non-discrimination rules contained in I.R.C. Section 105. Those rules prohibit discrimination in favor of highly compensated individuals as to eligibility to participate and the benefits provided by the HRA. Failure to follow these rules will result in reimbursements to all highly compensated employees being taxed.
Non-Discrimination Rules
| 1. | Definition of Highly Compensated Individuals | |
| a. | one of the 5 highest paid officers | |
| b. | shareholders who own more than 10% of the company | |
| c. | one of the highest paid 25% of all employees | |
| 2. | Eligibility Test | |
| a. | Plan must benefit at least 70% of all non-excludable employees; or | |
| b. | Plan must benefit at least 80% of all eligible employees and at least 70% of all non-excludable employees are eligible to join the plan | |
| c. | In order to be excluded for testing purposes, excludable employees also must be excluded from participation in the HRA by the terms of the plan | |
| d. | Excludable employees include: | |
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| 3. | Benefits Test | |
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| 4. | Taxation of Highly Compensated Individuals | |
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