Health Reimbursement Account - Advantages, Disadvantages, and Limitations

Advantages, Disadvantages, and Limitations

Advantages of HRAs for employers include:

• Reimbursements of qualified claims are tax-deductible for the employer.
• Employers know their maximum expense related to their health care benefit.

Advantages of HRAs for employees include:

• Contributions that employers make can be excluded from employees' gross income.
• Reimbursements may be tax free if the employee pays qualified medical expenses.
• Unused funds in the HRA can be rolled into future years for reimbursement.
• HRAs may be offered in conjunction with other employer-provided health benefits including Flexible Spending Accounts (FSAs).
• Employees do not have to be covered under any other health care plan to participate, unlike (for example) a Health Savings Account (HSA) which requires a High Deductible Health Plan.
• Employees can be reimbursed for a health care plan that meets their or their families' specific needs, as opposed to a standard company plan.

A frequent complaint regarding HRA arrangements is that they are extremely opaque in regards to their requirements. HRAs must follow "a variety of statutory rules and provisions" including the COBRA continuation coverage requirements, ERISA, and HIPAA.

HRA plans are considered "Primary Payers" subject to Medicare Secondary Payer (MSP) mandatory reporting requirements. There are significant penalties for failure to comply with the MSP reporting requirements. Although the MSP reporting requirements began to apply to certain group health plans on January 1, 2009, CMS has delayed mandatory reporting for HRAs.

Rules pertaining to their reimbursements are perceived by member participants to be somewhat contradictory and/or even incoherent- leading some to lose contributions which are intended for healthcare but are learned (after the procedure or laboratory test) to be disallowed

Limitations of HRAs include:

• Self-employed persons are ineligible (except as explained below).
• "Highly compensated" participants may be subject to "certain limitations."

A self-employed person may not take advantage of an HRA; that is essentially correct. However, a sole proprietor can employ their spouse and as long as their employable interest, the spouse, does in fact help with the business. Then the employer would need to establish a W-2 to make the spouse's employment legitimate. Thus the health care can be run through the business and will save the family, on the average, of $3,000 each and every year. As small businesses look to reduce costs, especially those tied to medical, this is a great tool that has been utilized by all too few since the tax law in 1954. HRA is treated as group health plans and subject to the medicare secondary payment (msp) provisions. HRAS are subject to the msp provisions regardless of whether or not they have end of year carry over feature.

Standalone HRAs that are not offered in conjunction with a High Deductible Health Plan are subjected to restrictions starting 2014. The Health Care Reform law essential bars the existence of these HRAs as a health plan with maximum benefit limit.