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Consumer-driven health plans such as Health Reimbursement Arrangements (HRAs) are designed to put consumers in control of a portion of the money employers spend on employees health care. Thanks to a June 26, 2002, ruling by the United States Treasury Department and the Internal Revenue Service that says certain HRAs are not taxable, these new accounts may be coming soon to an employer near you.
HRAs are employer-owned "accounts" used to reimburse you (your spouse and your dependents) for the purchase of health insurance or other eligible medical expenses. Unlike "flexible spending accounts" (FSAs) that require you to spend all the money in your account or lose it at the end of your benefit year, HRAs allow you to "rollover" unspent money from one benefit year into another. This gives you more control over your health care spending.
One drawback to HRAs is that your employer decides whether to keep your money or let you access the money when you leave your job. If your employer decides to give you access to your accrued HRA money — and it's used for nonmedical expenses, such as a severance package — all amounts paid by the plan become immediately taxable, including prior medical reimbursements.
In the same way that employers desperate to control spiraling health care costs embraced managed care in the 1980s, employers may now turn to HRAs, according to Paul Fronstin, a senior research associate at the Employee Benefit Research Institute, a national nonprofit organization based in Washington, D.C. "If this happens, within 10 years we may see 90 percent of employers enrolled in these type of [consumer-driven] plans," says Fronstin.
An HRA account exists only on paper. Employers don't have to specifically set the money aside for their employees. Rather, employers reimburse employees from company funds as eligible expenses are incurred.
| The biggest
drawback to HRAs is that your employer decides
whether to keep your money. |
A nontaxable HRA must be funded solely by your employer (not through salary deduction) and can provide benefits only for approved medical expenses, as opposed to some nonmedical reimbursements permitted for Medical Savings Accounts (MSAs). Unlike MSAs that are individually owned, your employer owns your HRA.
Most often, an HRA is paired with a high-deductible health insurance plan. To help you meet the cost of the deductible, your employer creates an HRA and credits you a flat dollar amount each year. Over time, the HRA grows in value as unused funds are carried over. If your medical expenses exceed the amount in your HRA, you pay the medical expenses until the deductible is satisfied and then the group health plan kicks in.
Your employer may also allow you to pair your HRA with a Flexible Spending Account (FSA). However, an HRA and a FSA cannot both reimburse the same medical expense. If an expense could be covered by either plan, your HRA plan may specify that the FSA coverage must be exhausted before the HRA coverage. If your HRA plan doesn't address the issue, then your HRA coverage must be exhausted before your FSA coverage kicks in.
One of the best features of HRAs is that they may be used to reimburse employees for the purchase of health insurance, including COBRA continuation coverage. COBRA often fails to perform well as a safety net for many laid-off workers because of its high price.
When a family elects to continue its health care coverage under COBRA, approximately two-thirds of the family's average monthly unemployment benefit must be used to pay the COBRA premium. This leaves little money leftover to pay the rent or mortgage and buy food. In this situation, an HRA could help a cash-strapped individual or family.
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