Section 105 medical reimbursement plans are a popular alternative to group health insurance for small businesses and nonprofits. One type of Section 105 medical reimbursement plan is a Health Reimbursement Arrangement (aka HRA or Health Reimbursement Account). HRAs are popular because they allow any employer to reimburse employees tax-free for their personal insurance premiums and other qualified out-of-pocket medical expenses, up to a plan-wide maximum dollar amount defined by the employer. Additionally, HRAs allow annual rollover of unused dollars for use in subsequent years.
However, new guidance limits the ability of certain HRAs to exist on a stand-alone basis starting January 1st, 2014. The guidance argues that, because stand-alone HRAs place a plan-wide maximum benefit on reimbursements, they will not be able to comply with both the annual limit (PHS Act 2711) and preventive care (PHS Act 2713) requirements simultaneously.
The preventive and annual limit rules do not affect the ability for a Section 105 medical reimbursement plan to reimburse individual health insurance premiums tax-free. Premium reimbursement is still allowed under the tax code via Section 105(b) (i.e. the definition of “medical care” in Section 213(d) still includes health insurance premiums).
However, starting January 1st, 2014, medical reimbursement plans must be designed to comply with PHS Act 2711 and 2713.
Healthcare Reimbursement Plans (or HRPs) are one possible alternative to HRAs. An HRP is a type of Section 105 self-insured medical reimbursement plan designed to reimburse employees for individual health insurance premiums tax-free. If structured correctly, an HRP can comply with PHS Act 2711 and PHS Act 2713.
A key distinction between an HRP and an HRA is that an HRP does not impose a plan-wide maximum annual benefit and does not allow annual roll-over.
How Healthcare Reimbursement Plans are Structured
A Healthcare Reimbursement Plan (HRP) is a Section 105 self-insured medical expense reimbursement plan structured to reimburse employees for:
Health insurance premiums up to a specified monthly healthcare allowance, and
Limited preventive care as required by PHS Act Section 2713.
To help limit the preventive care liability, an employer could require employees to show proof of having non-grandfathered minimum essential coverage to be eligible for the HRP. That way, the employee receives 100% preventive care services via their own health insurance plan (e.g. an individual plan or spouse’s employer plan).
How Healthcare Reimbursement Plans Comply
The Healthcare Reimbursement Plan (HRP) is structured to comply with the PHS Act 2711 annual limit requirements and the PHS Act 2713 preventive care requirements.
PHS Act 2713 requires the HRP to cover basic preventive care services without cost-sharing. The HRP meets this requirement.
PHS Act 2711 states that no annual or lifetime limits may be placed on essential health benefits. As a result, the HRP may not place an annual limit on the basic preventive care expenses required by PHS Act 2713. Separately, PHS Act 2711 states that annual limits and lifetime limits may be placed on benefits that are not essential health benefits. Since health insurance premiums are not essential health benefits, the HRP may place a “premium-specific” annual limit on premium reimbursements.
We look forward to discussion on this concept in the comments section.
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