Can HRAs Survive Healthcare Reform?

Friday, April 25, 2014

Health Reimbursement Arrangements (HRAs) are used to help employees pay for medical expenses incurred by the employee, his or her spouse, dependents, and any children who, at the end of the taxable year, have not attained age 27.  An HRA must be funded solely by the employer; employees cannot contribute to an HRA account.  HRA reimbursements are not included in the employee’s taxable income. Unused amounts can be rolled over for use in other plan years if the plan so provides. HRAs can also be offered only to those employees who enroll in group medical coverage sponsored by another employer.

HRAs are group health plans that are subject to Health Care Reform under the Affordable Care Act (ACA). Under the ACA, group health plans are barred from establishing an annual limit on the dollar amount of benefits for any individual (the Annual Dollar Limit Prohibition). In order to comply with this requirement, an HRA must be integrated with other group health coverage that itself complies with the Annual Dollar Limit Prohibition.  In other words, an HRA can be offered only if employer offers compliant primary group health coverage and the employee is actually covered under a group health plan that does not have an annual limit on the dollar amount of benefits.  Two important points to keep in mind:

  • the employer-sponsored HRA cannot be integrated with individual market coverage or with individual policies, even if the employer pays the premium; and
  • the primary group coverage in which the employee is actually enrolled does not have to be provided by the same employer that offers the HRA; for example, the linked coverage could be sponsored by the employer of the employee’s spouse. 

The ACA also requires that non-grandfathered group health plans must provide certain preventative services without imposing any cost sharing requirements for the service (the Preventive Services Requirements).  An HRA can satisfy this part of the ACA if the group health plan coverage with which it is integrated complies with the Preventive Service Requirements.

If the primary group health coverage that is linked to the HRA does not provide minimum value to the employee (that is, if the plan’s share of the total allowed costs of benefits provided under the plan is less than 60% of the costs), the HRA can only be used to reimburse co-payments, co-insurance, deductibles, and premiums under the non-HRA group coverage, as well as for medical care expenses that do not constitute essential health benefits.

Finally, the ACA requires that at least annually, an HRA must permit participating employees (or former employees if they are allowed to participate in the HRA) to permanently opt out of and waive future reimbursements from the HRA. Upon termination of employment, either the remaining amounts in the HRA must be forfeited or the employee must be permitted to permanently opt out of and waive future reimbursements from the HRA.

These new HRA rules take effect for plan years that begin on or after January 1, 2014.  However, they do not apply to funds credited to the HRA before January 1, 2013, or to amounts credited in 2013 under the terms of an HRA in effect on January 1, 2013. These funds can be used after December 31, 2013, to reimburse medical expenses pursuant to the terms of that HRA.