Note: None of this should be taken as legal or tax advice.
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Health Reimbursement Arrangement (HRA) plan offers employers more flexibility than traditional benefit programs. Now, new
HRA Software allows employers to design a comprehensive health benefits plan in three easy steps:
- Determine Employee Eligibility
- Choose Monthly Employee Contribution Amounts
- Set Reimbursable Medical Expenses
1. Determine Employee Eligibility for the HRA Plan
First, the employer decides which employees qualify for the health plan. An employer may decide to include (or not include) employees based on bona-fide job criteria such as job title, length of service with the company, geographic location, and hours worked per week.
Example:
Salt Lake Pizza company offers HRA health benefits to its managers and wait staff, but not to its drivers. Also, employees have to be with the company for 90 days before they get access to the HRA
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2. Choose Monthly Employee Contribution Amounts for the HRA Plan
Second, the employer chooses a monthly contribution amount that the company can afford. An employer may decide to vary the amount based on employee class based on bona-fide job criteria. Common employee classes include full-time versus part-time, job title, length of service, and geographic location.
Example:
Salt Lake Pizza company provides managers with a monthly allowance of $200/month, drivers with a monthly allowance of $150/month and wait staff with a monthly allowance of $100/month.
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3. Set Reimbursable Medical Expenses
Finally, the employer makes the determination on what types of IRS-qualified health care expenses can be reimbursed through the HRA plan. An employer may decide to limit certain type of expenses by expense category, which includes the removal (or inclusion) of expenses such as dental, vision, and pharmacy and the placement of a cap on the dollars that may be used for each expense category.
Example:
Salt Lake Pizza Company allows managers to be reimbursed for all type of IRS-qualified medical expenses with no restrictions. The company allows wait staff employees to be reimbursed for health insurance premiums and dental expenses only.
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As we discussed yesterday, the employer must purchase an
HRA Plan Document that spells out the employee eligibility, contribution and eligible expense rules of the HRA Plan.
Note: None of this should be taken as legal or tax advice.
Many
Third Party Administrators (TPAs) promote HRA Debit Cards (see
Health Reimbursement Arrangements) as a hassle-free mechanism for employee payment of medical expenses. However, employers should avoid using HRA debit cards because doing so is time-consuming, costly and unnecessary. Negative characteristics of HRA debit cards include:
- Pay and Chase
- Pre-funding of Contributions
- Manual Claim Requirements and Usage Restrictions
- Limited HRA Plan Design
1. HRA Debit Cards Often Result in Pay and Chase
The "pay and chase" nature of HRA Debit Cards is best explained by the following example:
Mary is an employee of Employer X that uses a HRA Debit Card platform. Mary goes to the doctor and is presented with a bill of $300 at the time of service. Mary pays for the service in full ($300) using the pre-funded HRA debit card provided to her by Employer X. Next, Mary's insurance provider sends her a bill for $200, incorporating the discounts that her insurance company had negotiated with her medical provider. Mary then needs to submit a claim for the service. She submits a claim for the $200 shown on the bill, but Employer X has already paid $300 from the HRA debit account. It is now Mary's responsibility to contact the medical provider, obtain the dollar amount overpaid ($100), and provide it to Employer X.
Employees who do offer an HRA without a debit card typically do not pay at the time of service and only request reimbursement using an Explanation of Benefits (EOB) from the insurer for the correct amount owed to the provider of service.
2. HRA Debit Cards Require Unecessary Pre-funding of HRA Contributions
HRA Debit Cards require the employer to unnecessarily pre-fund contributions to the TPA. Employers should never pre-fund any portion of the HRA contribution. This results in increased administrative (and operational) cost to the employer.
3. HRA Debit Cards Require Employees to Submit a Manual Claim
In order to maintain compliance, an employee must submit a manual claim form with proper substantiation after using the HRA debit card (Note: most major pharmacies are IIAS compliant and bypass the manual claim requirement, however the majority of health care providers do not bypass this requirement). This often results in employee confusion. For example, if an employee would like to use the
HRA debit card for reimbursement of over-the-counter (OTC) drugs, he or she must obtain a doctor's prescription and receipt from the pharmacy and submit that information the third party administrator. If the employee fails to submit the require information, the employer must "chase" the employee for the money.
Also, doctor offices, pharmacies, and other medical providers are not required to accept HRA debit cards. Employers often choose debit card HRAs to avoid out-of-pocket expenses for their employees, but the end result is usually confusion and added administration.
4. HRA Debit Cards Limit Employer Control and Plan Design Employers who choose to utilize HRA Debit Cards may not restrict card usage to certain types of medical expenses. They also cannot vary the contribution by employee classifications. These are lost HRA plan design features that often result in better benefits at lower costs.
Note: None of this should be taken as legal or tax advice.
The easiest way to offer health benefits today is via a
health reimbursement arrangement (HRA). With the right HRA Software, employers can now record tax-free health care reimbursements via their existing payroll service (e.g. Paychex, ADP, Quickbooks, etc.). When reimbursing employees tax-free via payroll, it is important to understand the difference between a payroll deduction and a payroll reimbursement.
What is a payroll deduction?
A payroll deduction is the removal of dollars from an employee paycheck.
What is a payroll reimbursement?
A payroll reimbursement is the addition of dollars to an employee paycheck.
How does a payroll reimbursement differ from a payroll deduction?
When an employer reimburses an employee through an HRA, employee gross salaries are not affected. An employer simply adds the dollars that have been approved for employees' qualified medical expenses (e.g. insurance premiums, doctor visits, etc.) to the employee's paycheck using a non-taxable line-item. This concept is often referred to as a "tax-free addition" or "negative deduction" on the paycheck.
What obligations does an employer have to report payroll reimbursements?
IRS Notice 2012-9 clarified that an employer is not required to report payroll reimbursements made through an HRA.
