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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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