Discussions of consumer-directed health plans frequently focus on high-deductible health plans coupled with Health Savings Accounts (HSAs). Sometimes overlooked are Health Reimbursement Arrangements (HRAs), employer-funded accounts that can be a solid first step in transitioning to a consumer-directed approach to health care.
In some ways, HRAs work like other kinds of account-type health care plans. Employees can use an HRA to pay for their qualified medical expenses, together with those of a spouse and children. Such expenses could include deductibles, copayment and coinsurance amounts, and any type of expenses that fall under the Internal Revenue Code definition of a qualified medical expense. Funds withdrawn to pay for qualified medical expenses are not taxable to the employee.
From an employer’s perspective, one of the great advantages of HRAs is that they have tremendous design flexibility. Unlike HSAs, they do not need to be tied to a high-deductible health plan. Their design, however, can complement the company health care plan. For example, if you have had to make changes to your company health plan to make it more affordable — such as increasing deductible or copayment amounts — you can offset the impact of such changes on employees by setting up HRAs and letting employees know that they have access to HRA funds to pay for these increased costs. The employer can also, by plan design, limit the expenses that can be paid for through the HRA (such as only for those increased deductibles or copayments); change or enlarge the scope of reimbursable expenses year to year; and change the contribution it makes to the plan each year.
For employers unable to sponsor a comprehensive type of medical plan, an HRA can be a way to provide some health care benefit to employees. The cost of the plan would be predictable — whatever amount the employer chooses to contribute to employees’ accounts — and could vary year to year. Employees could use their HRA funds to pay for medical expenses, or apply them toward the premium of a health plan they purchase on their own.
As noted above, HRAs are employer-funded accounts; no employee contributions are permitted. However, as with any type of health plan contributions, the contributions an employer makes to an HRA are deductible. Though funding HRAs entails some expense for employers, strategic implementation can sometimes be used to offset these costs to some degree. For example, if the HRA is implemented together with health plan design changes that help control plan costs — such as an increase in deductibles or copayments — the employer can use any premium cost savings to help fund the HRA.
HRAs also have the advantage of helping employees develop more awareness of the cost of health care. Just as when withdrawing funds from any type of savings account, each time employees contemplate using the HRA to pay for a medical expense they’re faced with considering whether they’re meeting the medical expense in the most cost-effective way possible. Such thinking is an incentive to take the steps necessary to make informed, cost-conscious health care spending decisions. And, since HRA funds carry over year to year (and are not forfeited, such as are unused amounts left in Health Care Flexible Spending Accounts), employees have additional reasons to be careful about how they spend HRA money. By design, however, an employer can limit the carry-over feature of the HRA and decide whether to make unused funds available for retirees to use.
HRAs offer the opportunity to provide a cost-defined, tax-advantaged health benefit that can help employees become more informed, savvy health care consumers. Of the many options employers have to choose from in providing health benefits to employees, HRAs are an attractive one to consider. Call our office today to find out in HRAs make sense for your organization.
