Health Reimbursement Arrangements allow employers to allocate health care dollars for employees to pay for eligible medical, dental or vision expenses. This shifts the decision to the consumer allowing them to be aware of the true cost of medical treatment when paying for eligible expenses. The unused balances can be rolled forward into the next year.
IRS Notice 2002-45
Under IRS Notice 2002-45 an HRA is an arrangement that is paid for solely by the employer and not provided pursuant to a salary reduction or otherwise under Section 125. The HRA limits must not be tied to Section 125 elections or usage. The HRA is an arrangement that reimburses the employee for qualified medical expenses incurred by the employee or dependents and provides reimbursements up to a maximum dollar amount for the coverage period. The HRA must not offer the choice of cash or non-taxable benefits. This includes bonus amounts tied to usage under an HRA.
Eligible expenses are nontaxable to the employee. The expenses under an HRA must be covered under Section 213(d)(1)(D) in order to be reimbursed. All expenses must be substantiated for a reimbursement to be valid. Partners, Self-employed, and Sub S shareholders are not eligible for HRA treatment, even though their employees are eligible. All reimbursements are tax exempt under Section 106 and Section 105 of the code.
Carry Over Feature
Unused amounts may be carried over to subsequent years. The unused funds may be available to terminated or retired participants even if no COBRA election is elected or available. Further, there is no statutory limit on accumulations to a participant. A cap may be placed on the accumulations by the plan.
HRA & FSA Coordination
The employer may provide for both an HRA and an FSA account. The FSA account is funded through a Section 125 cafeteria plan on a pre-tax basis. The HRA is funded by the employer. The plan document for the HRA may select the order in which benefits will be paid. Generally, the FSA money is paid first and then the HRA funds. The reason for this process is that the FSA is subject to forfeiture if not used in the current plan year and the HRA funds may be rolled into the next plan year. Also, the total FSA money is available on the first day of the plan year, and the HRA money may be credited each month.
Since the employee is responsible for the medical expenses under the health plan the availability of an FSA account in addition to the HRA account allows for the FSA to pay first and provide “up-front” money while the HRA deposits accumulate. Participant awareness of the actual costs of medical services will tend to help control health care costs.
We look forward to serving your employee benefit administration.