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A relatively new program called a Health
Reimbursement Arrangement (HRA) is now available and may be one
means of addressing rising health care costs. HRAs have been around
for many years, but the IRS officially “approved” them in 2002.
Most of you are familiar with flexible spending accounts, provided
under Section 125 of the IRS Code. An employee has money withheld in
this flex account, it is deducted pre-tax, and the employee then has
the ability to be reimbursed for qualifying medical expenses. This
allows the employee the opportunity to pay medical expenses with
tax-free income, and increases the spending value of income by
decreasing the tax liability. However, money put into a flexible
spending account must be used by the end of the calendar year or the
employee loses it. Though this can generally be avoided through
proper planning, many employees avoid enrolling in flex spending
plans because of this use-it-or-lose-it requirement.
The HRA, provided in Section 105 of the IRS Code, is similar to flex
spending with two significant differences. First, the money is put
into the plan by the Employer instead of the employee. Second, the
money can roll over from year to year - even into retirement. There
are few rules and employers are able to set up plans in just about
any way they wish. The money is not taxable income for the employee,
and the employer is not required to pay fringe benefits on
contributions to HRA plans.
But there are a few rules. For example, only the employer may make
contributions to the plan. The plan must pass a non-discrimination
examination - usually an issue only in places with very high
salaries, so it shouldn’t concern our members! If the plan is
written to allow pay out of cash to employees (for example, any
unused money is paid our upon retirement), such a stipulation makes
all of the contributions to the HRA taxable income. So, as a
practical matter, the money can never be paid out for other than
qualifying medical benefits, or you essentially defeat the purpose
of establishing it in the first place.
HRA and flexible spending money may be used for a wide spectrum of
medical costs. Some examples: Co-pays for office visits; co-pays for
prescriptions; glasses and contact lenses; dental expenses and
orthodontics; mileage to and from medical appointments - virtually
any medical expense that is not covered by medical insurance. And
the IRS held in 2003 that this coverage also extends to
over-the-counter medications. So things like aspirin, cough
medicine, non-prescription allergy and sinus medication and contact
lens solution are also reimbursable.
So what is the benefit of this program? Insurance premiums can be
drastically reduced by increasing co-pays. Changing the co-pays for
office visits from $15 to $20 with a similar increase in
prescription co-pays lowered the monthly premium almost $150 for a
family plan in one municipality. In order to convince the employees
to accept the higher co-pays, the employer offers to put (for
example) $500 a year into an HRA for each employee. The employer
saves $1800 on premiums, and spends $500 on the HRA. The employee
has $500 per year to apply to increased co-pays, and has the ability
to carry over any portion of the $500 that is not spent that year.
For an “average” employee, this may well provide better coverage
than the old $15 co-pay plan, as the $500 in the HRA may be used to
pay some or all of the co-pays that were required under the previous
plan. This is, potentially, a classic win-win agreement.
Of course, there are some “risks.’ Most of the higher co-pay plans
also include additional charges in some other areas. For example,
some require the employee to make a $100 co-payment for any
admission to the hospital. Some plans require a co-pay for
chemotherapy, radiation and dialysis treatments that may have been
covered in full under the more costly plan. It is necessary to
carefully review the plans and do a side-by-side comparison so that
you know if there are additional changes. But the effort may very
well be worthwhile, as it may help employers and unions craft a
creative solution to rising health care costs.
For added information:
Click here for a
comparison chart obtained from Benico.com
Click here
for a fact sheet on HRAs from the Internal Revenue Service
Click here for information
on HSAs - which are plans intended for employees covered by a high
deductible plan. Research these carefully before agreeing. |