HRA card The HRA has the mostflexibility of any pre-tax account. As the employer, you choose theamount of the benefit, the eligible expenses for reimbursement, andwhether to include a rollover provision. (Photo:Shutterstock)

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Pre-tax salary withholding plans come in many shapes and sizes.You may even hear them referred to by several different names likecafeteria plans, section 125 plans, or flexplans.

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Pre-tax health accounts and premium reimbursements are availablebecause of Internal Revenue Code (IRC) section 125. Plans formedunder section 125 are often called "cafeteria plans" because theyallow employees to lower their taxable earnings to pay for pre-taxbenefit offerings pre-selected by the employer.

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Without such plans, employees are taxed on their entire incomeunder a doctrine called constructive receipt. But a plan formedunder section 125 allows payroll deductions to be taken pre-tax forcertain benefits (ex. group health and dental).

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Related: Help employees understand how 'pre-tax' maximizestotal compensation

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In addition to these (usually) fully insured group plans,employers can sponsor pre-tax accounts and allow employees to takeadditional pre-tax payroll deductions to fund these benefits.Popular options are flexible spending accounts (FSAs) and healthsavings accounts (HSAs). Health reimbursement arrangements (HRAs)are another pre-tax health account, but it is funded entirely bythe employer.

Health Reimbursement Arrangements (HRA)

Another pre-tax account that can be used to pay for qualifiedmedical expenses is the HRA, a flexible benefit that can be offeredby any size employer. An HRA is a self-funded health plan that canonly be funded by the employer. No employee salary reductions arepermitted.

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A traditional HRA must be paired with a group medical plan tosatisfy the requirements of health care reform. Employers that donot sponsor a group health plan are not eligible to sponsor thistype of HRA.

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The beauty of the HRA is that it gives you the ability tocontrol the financial risk. It is also tax-free to employees andtax-deductible for employers. The HRA has the most flexibility ofany pre-tax account we have previously discussed. As the employer,you choose the amount of the benefit, the eligible expenses forreimbursement, and whether to include a rollover provision.

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For example: Let's say an employer chooses a high deductiblehealth plan with a $2,000 deductible for a single employee, whichshould allow them to have a lower premium. The employer realizes itis a very high cost for the employees to pay out of pocket, so hedecides to open an HRA to help reimburse deductible expenses. Tolimit the employer's exposure, the employee will be responsible topay the first $500 of the deductible and the employer will coverthe remaining $1,500.

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Although this HRA plan type is the most common, there are sixdifferent ways that HRAs can be structured.

6 HRA plan types

There are currently six different plan types for HRAs, with twoof them being brand new additions:

  1. An HRA integrated with a group health plan (mentionedabove)
  2. Limited purpose HRA: dental and vision only
  3. Retiree HRA
  4. Qualified small employer HRA (QSEHRA)
  5. Individual coverage HRA (ICHRA) (New HRA option available onJan. 1, 2020)
  6. Excepted benefits HRA (EBHRA) (New HRA option available on Jan.1, 2020)

A QSEHRA is a useful tool for non-applicable large employers(less than 50 full-time and full-time equivalent employees) to helpemployees pay for health coverage and out of pocket expenses. Someadditional details:

  • Employers are only eligible to sponsor a QSEHRA is they do notsponsor any other form of group health plan (including dental orvision) and employees must be enrolled in some form of minimumessential coverage (MEC) to be eligible for reimbursements.
  • QSEHRA is limited in 2019 to $5,150 for single only and $10,450for family coverage.

In a recent blog post, we explored the two new HRAs thatwere introduced by the Departments of Health and Human Services(HHS), Labor (DOL), and the Treasury (IRS) on June 13, 2019.

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An ICHRA, also known as premium reimbursement HRA, is analternative to traditional group health plan coverage. Someadditional details:

  • ICHRAs can be used to reimburse premiums for individual healthinsurance by employees not offered coverage under an employer grouphealth plan.

  • This is useful if an employer offers a group health plan buthas an employee class carved out from eligibility under their plan,like part-time or seasonal employees.
  • This type of HRA can be used for qualified medical expenses,including individual medical insurance and Medicare premiums.
  • An EBHRA is the second new alternative to traditional grouphealth plan coverage, subject to certain conditions. Someadditional details:

    • It allows employees that are eligible for an employer grouphealth plan to be reimbursed up to $1,800 annually pre-tax, even ifthey don't enroll in the group health plan.
    • This type of HRA can be used for qualified medical expenses,including premiums for vision and dental insurance, COBRAcontinuation coverage, and in some circumstances short-term,limited-duration insurance (STLDI).

    Additional guidance is coming soon from the IRS regardingseveral outstanding issues, such as a safe harbor for ICHRAs withregards to the Affordable Care Act (ACA) requirements ofaffordability and minimum value.

    Benefits process

    Since an HRA is 100 percent employer-funded, theemployer is in complete control of the benefit plan offered. Forthose HRAs integrated with an employer sponsored group health plan,the employer needs to choose the health plan they are willing tooffer.

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    In addition, an employer sponsor of any type of HRA will need tochoose the expenses to reimburse, the limit and if participantswill be able to rollover money. As participants incur specificexpenses, they submit the expenses and get reimbursed directly fromthe employer.

    Compliance checklist

    What type of compliance measures should you consider with anHRA?

    • HRAs must have proper plan documentation in place, including awritten plan document and summary plan description distributed toparticipants.
    • HRAs are considered a group health plan and are subject to thereporting and disclosure requirements under ERISA.
    • Annual NDT needs to be completed during the plan year. WhileHRAs are not included in the section 125 testing, HRAs are subjectto testing under section 105.
    • Virtually all HRAs are going to be COBRA-qualified. An employersubject to COBRA must pay attention to ensure that participantsexperiencing qualifying events are supplied with the propernotices.
    • As a self-insured group health plan, HRAs are subject to PCORIfees. HRAs will be exempt from PCORI fee requirements ifit qualifies as an excepted benefit. An HRA only qualifies as anexcepted benefit if either the maximum benefit is not greater than$500 or it only reimburses limited scope benefits (like dental orvision).
    • HRAs are subject to some ACA requirements, which includespecific Form W-2 reporting, and annual distribution of a summaryof benefits and coverage (SBC).

    As a reminder, Medicare is the United States' health insuranceprogram for people age 65 or older. It is a federally fundedbenefits program that is taxed equally to the employee and employeras payroll deductions.

    What to expect when offering pre-tax benefitaccounts

    When you offer pre-tax benefit accounts to your employees, youcan expect employee participation and engagement to rise. You willalso see that the financial burden of current and futureout-of-pocket expenses will be reduced.

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    Tax savings will increase for both the employee and employer.With each of these benefits in mind, an employer can expect toretain employees and attract new ones to their business.

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    Cassie Yatcilla is themarketing coordinator at PrimePay. Graduating with a degree in Advertising andPsych, she likes to understand what makes people act in the waysthat they do. 


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