Healthcare Reimbursement Arrangements:
Healthcare Reimbursement Arrangements are actually part of the IRS code section 105 “defined contribution plans”. Final regulations were released in June of 2002 allowing for HRA’s to be allowed on a tax favorable basis.
By purchasing a high deductible health insurance plans an employer reduces his/her premiums. From these premium savings, monies can be set aside to help offset some or all of an individuals additional out of pocket liability.
- IRS guidelines allow for the following
• There are no plan design requirements to qualify for an HRA plan
• HRA accounts must be funded with employer dollars
• Monies reimbursed to an employee for eligible out of pocket medical expenses are deductible to the employer (monies are not deductible until actual reimbursements are made)
• Monies are received by the employee as non-taxable income
• Employers can elect to have the entire fund assigned to the employee or only reimburse for actual eligible expenses incurred
- Assigning the entire fund to the employee
• Premiums savings are automatically reduced since funds are assigned regardless of actual claims experience
• The entire amount pledged to the HRA becomes the employees
• Unused portions of the funds are carried over from year to year
• Should employment terminate the employee takes the balance of his/her fund and can continue to use for eligible reimbursements without taxation or penalty
• After age 65 monies can be withdrawn for non eligible medical expenses subject to normal income tax but no penalty
- Reimbursing only for actual eligible expenses incurred
• Total amount of HRA must be available if eligible expenses are incurred
• Employer retains unused funds
• Premium savings are only reduced by eligible reimbursements when and if they are incurred
Consumer Driven Health Plans are not the panacea for reducing future health insurance costs. The change to a higher deductible provides an immediate reduction in premium costs; however, these will continue to escalate each year at the same rate as current plan costs.
The true key to a long-term CDHP is to change the behavior of individuals by making them better consumers (i.e. understanding the cost of health care) and providing incentives for controlling these costs and working toward a healthier lifestyle.
Today, most Consumer Driven Health Plans have taken the approach that by employees seeing more information regarding the cost of health care will come to realize the need to help in controlling future costs. They also feel that having an HRA or HSA account will cause individuals to take ownership of these funds and be somewhat wiser in their expenditures.
While the above arguments may have some merit, we are doubtful that they will create a significant turn around in lifestyle habits, particularly on plans where the funding is provided by the employer. To truly affect behavioral patterns requires a combination of employee education, incentives for achieving changes now, as well as programs to assure on-going efforts to improve ones health and lifestyle.