Favorable
Tax Treatment. Coverage under
an HRA and expenses reimbursed through
the HRA are excludable from the
covered individual’s gross
income. As with FSAs, however, the
individual may not claim an income
tax deduction for an expense that
has been reimbursed under an HRA.
Solely an Employer-Paid Benefit.
An HRA must be paid solely with
employer dollars. It cannot be paid
for, directly or indirectly, through
employee salary reduction elections,
and it cannot be provided through
the employer’s cafeteria plan.
Reimbursement for Medical Expenses
Only. An HRA may be used only
to reimburse employees for medical
expenses (as defined in the tax
law), provided that the employee
provides proper substantiation.
Reimbursable expenses include amounts
paid for premiums for other accident
or health coverage. Long-term insurance
premiums may be paid from an HRA,
but direct long-term care expenses
may not. An arrangement cannot qualify
as an HRA if it permits participants
to receive cash or any taxable or
non-taxable benefit.
Carry-Over of Unused Coverage.
One of the most significant features
of HRAs is that they can allow the
unused portion of plan coverage
to be carried over to subsequent
coverage periods. For example, any
amounts left over at the end of
a yearly coverage period may be
carried forward to the next year’s
coverage period. There are no limits
on the amount that may be carried
forward or the number of years for
which an amount may be carried forward.
However, at no time may the participant
receive cash, directly or indirectly,
for any unused amounts in the HRA.
Retirees May Be Covered.
An HRA may cover both current and
former employees(including retirees)
and their spouses and tax dependents.
The surviving spouse and dependents
of a deceased employee may also
be covered. Many employers have
been interested in establishing
defined contribution health plans
as an alternative to or in conjunction
with traditional retiree health
care.
Coordination with Major Medical
Plan. An HRA may be provided
in conjunction with the employer’s
primary group health plan. For example,
the employer may offer a high-deductible
major medical plan along with coverage
under the HRA. Employees may use
the HRA to receive reimbursement
for deductibles, co-pays, and other
expenses not covered under the primary
group health plan.
Salary Reduction May Not Be "Linked"
to the HRA. An HRA may be offered
alongside an accident and health
plan (e.g., major medical coverage)
that is funded through a cafeteria
plan; however, salary reduction
dollars that pay for the accident
and health coverage may not be "attributable"
to the HRA. The Notice provides
that all the facts and circumstances
are considered in determining whether
the salary reduction is attributable
to the HRA, but sets some limits
or safe harbors for determining
such linkage.
Coordination with Flexible
Spending Accounts. As mentioned
above, HRAs differ in many respects
from FSAs. As a result, the IRS
has specifically exempted HRAs from
several of the requirements that
would otherwise apply to FSAs. An
employer may offer both an FSA and
an HRA. The same expense cannot,
however, be reimbursed under both
the HRA and the FSA. Special ordering
rules require that if an employee
has coverage under both an FSA and
an HRA, reimbursements must first
be made from the HRA before they
can be made from the FSA. Alternatively,
FSAs and HRAs can be structured
to provide for reimbursement of
mutually exclusive types of medical
expenses (such as permitting the
FSA to cover only vision expenses
and permitting the HRA to cover
all other forms of medical expense).
Further, if the HRA and FSA cover
the same expenses, the HRA plan
document may, prior to the plan
year for the FSA, specifically provide
that coverage under the HRA is available
only after the FSA funds have been
used.
COBRA. An HRA is considered
a "group health plan"
for purposes of the health care
continuation coverage requirements
under COBRA. A participant electing
COBRA coverage must be eligible
to receive the maximum amount of
reimbursement that was otherwise
available at the time of the COBRA
qualifying event. The amount available
must be increased at the same time
and in the amount as any increase
for similarly situated non-COBRA
beneficiaries. In addition, the
COBRA premium may not differ for
similarly situated COBRA beneficiaries,
regardless of the dollar amount
available to each individual.
Nondiscrimination Rules Apply.
An HRA must comply with tax rules
that prohibit discrimination in
favor of highly compensated individuals
with respect to eligibility, contributions
or benefits. As a result, HRAs could
not be offered to only high-paid
executives.
