Health Reimbursement Arrangement (HRA) Chapter 48 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company1 What is it? Employer reimburses covered employees for specified medical expenses directly from corporate funds HRA is used –as a substitute for health insurance –as a supplement to provide payments for medical expenses not covered under company’s health insurance plan –to pay for medical expenses in excess of company’s health insurance plan

Health Reimbursement Arrangement (HRA) Chapter 48 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company2 When is it Indicated? 1.Closely held corporation and shareholders and family are primary or only employees 2.In professional corporation where only employee is high income professional or where are few other employees 3.Employer would like to provide employees with medical benefits beyond basic medical

Health Reimbursement Arrangement (HRA) Chapter 48 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company3 Design Features Plan adopted by corporate resolution specifies –group of employees covered –types of medical expenses that will be reimbursed –any limits or conditions or payment by the company Employer reimburses employee for claims covered under plan

Health Reimbursement Arrangement (HRA) Chapter 48 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company4 Design Features Benefits tax-free if –qualify for medical expenses under IRS code –plan is nondiscriminatory Broad range qualified medical expenses Plan can be fully funded or insured Insurance contracts provide (1) administrative services, (2) claims evaluation, (3) stop loss coverage

Health Reimbursement Arrangement (HRA) Chapter 48 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company5 Tax Implications 1.Employer may deduct 100% of –cost of benefits paid to employees under plan –plan administrative expenses –cost of any insured stop loss coverage 2.Annual employer deductions are limited 3.Benefits tax-free unless plan is discriminatory 4.Employee eligible for itemized medical expense deduction; limited to amount by which total of all eligible medical expenses exceed 7.5% of taxpayer’s adjusted gross income

Health Reimbursement Arrangement (HRA) Chapter 48 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company6 Tax Implications: Nondiscrimination Rules If fail nondiscrimination tests, benefits taxable to highly compensated employees Two tests –coverage –benefits

Health Reimbursement Arrangement (HRA) Chapter 48 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company7 Tax Implications: Nondiscrimination Rules Coverage test – plan must benefit –70% or more of all employees –80% or more of all employees who are eligible to participate in the plan if at least 70% of all employees are eligible to participate OR –a classification of employees, established by employer, that does not discriminate in favor of highly compensated employees

Health Reimbursement Arrangement (HRA) Chapter 48 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company8 Tax Implications: Nondiscrimination Rules Who can be excluded from coverage tests? –employees with less than 3 years of service –employees under age 25 –part-time or seasonal employees –employees in a collective bargaining unit if have good faith bargaining on health plan issues –nonresident alien employees who received no U.S. income

Health Reimbursement Arrangement (HRA) Chapter 48 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company9 Tax Implications: Nondiscrimination Rules Benefits test All benefits provided for highly compensated employees under the plan must be provided for all plan participants

Health Reimbursement Arrangement (HRA) Chapter 48 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company10 Tax Implications: Nondiscrimination Rules Who can be excluded? –Employees with less than 3 years of service –Employees under age 25 –Part-time or seasonal employees –Employees in collective bargaining unit having good faith bargaining on health plan issue –Nonresident alien employees who received no U.S. income

Health Reimbursement Arrangement (HRA) Chapter 48 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company11 Internal Revenue Code Eligibility and Coverage Requirements HRAs must comply with requirements for group health insurance regarding: –limits on exclusions for preexisting conditions –conditions for which participants cannot be excluded or charged a higher premium –length of hospital stay for childbirth –benefit limits for mental illness

Health Reimbursement Arrangement (HRA) Chapter 48 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company12 Internal Revenue Code Eligibility and Coverage Requirements Penalty for noncompliance is same as COBRA, usually $100 per day for each individual up to a total of the lesser of 1)10% of the employer’s payments under group health plans for the previous year or 2)$500,000

Health Reimbursement Arrangement (HRA) Chapter 48 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company13 COBRA Continuation Coverage Under COBRA, an employer must provide option to continue an employee’s existing health plan coverage (incl. dependent coverage) for 36 months after various qualifying events –death or divorce of employee –employee eligible for Medicare –bankruptcy –child ceases to be dependent for plan purposes

Health Reimbursement Arrangement (HRA) Chapter 48 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company14 COBRA Continuation Coverage Health plan coverage must continue for –18 months if terminate employment (except for gross misconduct) or reduce employment hours –29 months if termination is for disability

Health Reimbursement Arrangement (HRA) Chapter 48 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company15 COBRA Continuation Coverage Continuation coverage can terminate before the 36, 29, or 18 month period if –employer terminates health plan for all employees –beneficiary does not pay own share of premium –beneficiary covered under another health plan, unless a preexisting condition is excluded

Health Reimbursement Arrangement (HRA) Chapter 48 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company16 COBRA Continuation Coverage Former employee’s or beneficiary’s share of premium under COBRA cannot be more than –102% of premium paid by those without qualifying event –150% of premium after 18 th month of continuation coverage for disabled Fine for noncompliance is $100 per day

Health Reimbursement Arrangement (HRA) Chapter 48 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company17 ERISA Requirements An employer’s HRA is a welfare benefit plan under ERISA and subject to ERISA requirements

Health Reimbursement Arrangement (HRA) Chapter 48 Employee Benefit & Retirement Planning Copyright 2009, The National Underwriter Company18 Discussion Questions 1.Can an HRA be designed to exclude rank-and-file employees by funding the HRA though a health insurance contract? 2.What are the advantages and disadvantages of designing an HRA that discriminates by covering only specific executives?