Health Reimbursement Accounts (HRA)

The Background: In June of 2002, the IRS established a ruling and some terminology for what are now known as Health Reimbursement Arrangements (HRAs). A HRA is an extension of a qualified medical reimbursement plan in which the employer agrees to provide for reimbursement for certain employee medical expenses. This process has always enjoyed a tax favored status as employer payments for reimbursement of IRS qualified medical expenses are deductible to the employer and not considered taxable income to the employee. The 2002 ruling added clarification that an employer promise of reimbursement that goes unused in a given year, can, in fact, be carried forward for future year’s expenses without adverse tax consequences.

Additionally, this ruling led to the establishment of several rules and guidelines for HRA utilization. In essence, non-discrimination rules, and other various guidelines were provided. Check with your agent as to the suitability of your situation for use of an HRA plan.

So, in essence, an HRA plan, is an arrangement through which an employer allocates dollars for the reimbursement of employee (and dependent) qualified medical expenses not covered elsewhere. Funds for HRAs reimbursements always come from the employer, NOT from the employee.

The Benefit: The benefits of an HRA plan vary widely from plan design to plan design, but most often the plan is designed to save the employer money without significant compromise to the employee benefit plan. An HRA is most often coupled with a high-deductible health plan, which reduces premium considerably. This high deductible however becomes an issue of contention with the employees receiving the benefit. The employer utilizes some or all of the savings to establish authorized reimbursement of employee qualified medical expenses for a portion of that deductible amount for those employees that actually incur medical expenses. Often the numbers show that the employer can provide benefits comparable to the previous benefit structure at an overall reduced cost. Additionally, if the employee population enjoys a favorable level of expenses, the employer retains the funds allocated for those expenses as well as the premium reduction for the high deductible health plan.

Additionally, the advantages of an HRA include a higher level of consumer awareness as to the spending for health expenses. Employees would typically prefer keeping their expenses to within the employers’ allotted amount, thereby having full coverage for their needed expenses. This is likely to change employee behavior somewhat to reduce over utilization of the health care system.

Finally, the design advantages of a HRA include:

1. Choice – Consumers have control over the money in their account and can choose how and where it is spent. They can make the most of their dollars.

2. Flexibility for employers – Employers have a greater selection in what kinds of plans can be offered. The HRAs can be offered alone or in conjunction with another type of health plan.

3. Savings for consumers – Consumers can save for future medical expenses as the unused funds in the consumer’s account can rollover from year to year if the employer decides to structure the HRA in this way.

4. Savings for employers - lower health care costs across the board.

Health Savings Accounts (HSA)

The Background: The recent Medicare Modernization Act provided many changes to Medicare, but also included major revision of what used to be called “Medical Savings Accounts” (MSAs). This switch from MSAs to the new phraseology of “Health Savings Accounts” (HSAs), came with considerable improvement, and reduced restrictions on the use of HSAs.

HSAs, are accounts set up to pay for medical care, including dental and vision, and allow the consumer to build up savings to pay for future medical expenses. HSAs can be established by individuals covered by a qualified high deductible health plan. Coverage under a High Deductible Health Plan (HDHP) is required in order to establish a Health Savings Account.

The Benefit: By purchasing a qualified HDHP, one can save a tremendous amount of premium from a more traditional style of health plan or HMO. The savings from purchasing a HDHP is often enough to offset or justify the higher deductible on the health plan. This leaves the consumer with a win-win situation - “If I have medical expenses, I’ve saved enough premium to pay for them anyway AND if I don’t have significant medical expenses, I keep all of the premium savings!”

While this buying strategy has always been available, the legislation providing the ability to make a tax-deductible deposit of an amount equal to your deductible into a tax favored savings account, has vastly improved the outlook for this strategy.

The advantages of a Health Savings Account include:

1. Security – combined with a high-deductible health plan, a HSA protects the consumer against unexpected or high medical bills.

2. Affordability – lower premiums with a HDHP, combined with a HSA are more affordable for the employer AND the employee.

3. Flexibility – consumers can use money for things insurance doesn’t cover such as over the counter medications, or they can save the money for the future.

4. Savings – Save for future medical expenses, the funds in the consumer’s account rollover from year to year.

5. Tax Benefits – the consumer can reduce their taxable income with the amount deposited into their health savings account. The savings account can always be sued for qualified medical expenses on a tax-free basis. The savings account can be used after age 65 as additional retirement funds, or retained for future medical expenses.

Example of Annual Savings to Consumer:

The maximum HSA contribution allowed for family coverage in a calendar year is $5,000.

This sample is for comparison purposes only. These are not actual rates or quotes. Our agents can provide you with more information.

How do I set up a HSA?

How can I find out more information about where my dollars will go?