Frequently Asked Questions About HRAs
What are some expenses I could deduct with a Simple 105 HRA?
- Over the Counter medications*
- Health & Dental Insurance Premiums
- Vision Care and Eyeglasses
- Prescription Medications
- Physician Office Visits
- Chiropractic Care
- Deductibles & Co-Payments
- Long-Term Care Insurance Premiums
- Dental Care & Orthodontia
Why would an employer adopt such a Plan?
There are a number of potential reasons why an employer may look at an HRA:
-To decrease insurance premium rates
Result:
a) Employer moves to a higher deductible plan and adopts an HRA to help fill the "gap".
b) Employer chooses to allow employees to voluntarily opt for a higher deductible plan and ties an HRA to that plan only. c) Employer drops certain types of coverage,(Health, Dental, LTC) completely and adopts an HRA to cover costs. (Employee may or may not choose to purchase Health Insurance)
-Employer is instituting or adding a benefit plan for their employees.
-Employer is dropping Group Health Insurance coverage and setting up an HRA for employees to purchase individual coverage.
The employer also has the option to place restrictions on the types of expenses, even within the category of out-of-pocket expenses, that the HRA can be used for.
What is FEBCO's role in the HRA?
FEBCO has compiled a complicated set of tax codes and regulations that allow a business to set up this type of benefit program. FEBCO will create and supply all of the necessary documentation necessary for an employer to satisfy the requirements of the IRS, Department of Labor, ERISA, and HIPAA. This includes:
- Plan Document
- Adoption Agreement
- Summary Plan Descriptions
- An annual review and re-election of the Plan
- Sample Certificates of Continued Health Coverage (as required by HIPAA)
- Internet based software to track and record monthly reimbursements to employees
The employer still is required to keep track of the reimbursements to the employee and making those reimbursements on a periodic basis of their choosing.
What does the IRS say?
The Simple 105 HRA plan is based on several sections of the Internal Revenue Code, including sections 105, 106, 162, 213, and Revenue Ruling 71-588. In 1994, the IRS issued a National Office Technical Advice Memorandum regarding this plan. Also, in 1999 the IRS Industry Specialization Program offered a coordinated issue paper regarding Section 105 medical reimbursement plans. The latest information released by the IRS in 2002 was Revenue Ruling 2002-41 and Notice 2002-45
Why haven't I heard of this type of Plan before?
Section 105 of the Internal Revenue Code was written in 1954, however, only recently have these Plans become more widespread. The main reason for this change is the increasing cost of medical care and health insurance and the need for a way to decrease those expenditures. Today, thousands of tax professionals, financial planners, and small business consultants are now introducing their clients to companies who provide this type of Plan.
Does the HRA replace my current benefit Plan?
That's the best part of the HRA. It can be layered or partnered with other health benefit plans already in place, such as a Flexible Spending Account.
Can I do this on my own?
While there is no requirement that you use a third party administrator, it is important that your Health Reimbursement Arrangement complies with all IRS, DOL, and ERISA guidelines. For this reason, most tax professionals encourage their clients to use a company that specializes in this type of employee benefit plan, just as they would with other types of benefit plans.
Are medical expenses incurred prior to establishing a Simple HRA eligible for reimbursement?
Medical expenses (including health insurance premiums) incurred prior to enrollment in an HRA are not eligible for reimbursement. Only those expenses incurred after a plan is established can be included. The IRS reiterated this position in a coordinated issue paper published in March, 1999. Because some plans are still out of compliance the IRS has issued an additional notice with Revenue Ruling 2002-58.
What happens if my employees submit more expenses (or fewer expenses) than the benefit maximum?
Under the Simple HRA plan , employees are able to "carry forward" unused benefit amounts to subsequent plan years up to a maximum "carry forward" amount. The employer can choose to allow or disallow this option. In situations where an employee incurs more medical expenses than the plan maximum allows, the additional expenses can be submitted for reimbursement in subsequent plan years.