Health Reimbursement Arrangements
A health reimbursement arrangement is an arrangement that is paid for solely by the employer. It must not be directly or indirectly funded by employee contributions. An HRA reimburses the employee for qualified medical care expenses (as defined by §213(d) of the Internal Revenue Code) incurred by the employee and the employee's spouse and tax dependents (as defined in §152).
ERISA and COBRA Requirements
An HRA is considered an ERISA plan. Thus, the plan must have a written document called a Summary Plan Description that is distributed to participants. Additionally, the plan must file a Form 5500, if applicable.
If the employer is subject to COBRA (has 20 or more employees), COBRA beneficiaries must be offered the opportunity to continue the HRA coverage through COBRA. When an employee elects COBRA continuation for the HRA, the employer would need to continue funding the account in the same manner as is done for active employees. The employer may charge the employee a COBRA premium for the HRA participation. The premium is determined by calculating the employer's actual cost of the HRA benefit for that year.
The IRS issued guidance in calculating HRA COBRA premiums in IRS Notice 2002-45. The plan must take the total cost of the HRA benefit based on historical data and average the cost per participant. Thus, the employer would need to see what the average cost to them was in the previous years of providing the benefit and then divide that by the number of eligible participants. Due to the fact that some employees do not take advantage of the maximum reimbursement amount, it is unlikely that the premium would be exactly equal to the employer's maximum contribution amount. As with other COBRA premiums, the HRA premium can be 102 percent of the determined cost.
Are owners permitted to participate in an HRA?
A C-Corp owner who is an employee of the company would be eligible to participate in the HRA. However, an S-Corp owner would not be eligible for the HRA. The IRS has stated that 2 percent shareholders of an S-Corp, sole proprietors, and partners in a partnership are treated as self-employed and are not eligible for the tax-free benefits of an HRA. Additionally, the IRS has informally stated that such individuals would not even be eligible for the HRA on a taxable basis.
Our company offers employees coverage under a high deductible health plan (HDHP). The company contributes an amount equal to the deductible to an account for each employee. The account reimburses the employee for out of pocket medical expenses. Is this an HRA?
Yes, this type of arrangement would be considered an HRA because it is: 1) reimbursing employees for medical expenses on a tax free basis, 2) paid for entirely by employer contributions, and 3) provides reimbursement up to a maximum amount for a certain coverage period. Thus, the plan would be required to comply with the ERISA and COBRA requirements. Additionally, if the plan is self-administered by the employer, the plan would also need to comply with the full requirements of the HIPAA Privacy and Security Regulations as the plan is a self-funded plan receiving protected health information on participants
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