FSA vs. HRA vs. HSA

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Retirement Income Planning

FSA vs. HRA vs. HSA

FSA - Flexible Spending Account

MSA - Medical Savings Account

HRA - Health Reimbursement Account

HSA - Health Savings Account

HRA Overview

Employer-funded medical expense reimbursement plan
No salary reductions or flex credits
Reimburse out-of-pocket medical expenses and certain insurance premiums
May permit carryovers of unused amounts and allow individuals to spend down their accounts

HRA

Consumer Driven Health Program(CDHP) - HRA offered with high deductible medical program
HRA created by June 2002 IRS guidance
IRS Revenue Ruling 2002-41 and IRS Notice 2002-45
Other non-tax laws
ERISA - COBRA – HIPAA

Reasons to Establish an HRA

Provide medical benefits to employees on a tax-free basis with optional carry over and spend downs
Lessen impact of increases in health plan premiums
Overall reduction in health care expenses
Provide retirees:
        Employer funded accounts
        Ability to pay for out-of-pocket medical expenses
        Including medical insurance premiums

Comparison of HRA’s to FSA’s

•HRA 100% employer funded

•FSA can be funded by employee contributions and employer contributions

•HRA permits carryovers

•FSA subject to “use it or lose it”

•HRA offers monthly accruals of funding

•FSA has “Uniform Coverage Rule”

HRA can reimburse expenses incurred in one year in a subsequent year

•HRA can reimburse certain insurance premiums

•HRA’s amd FSA’s can “coexist” side by side

Comparison of HRA’s to MSA’s

MSA's are limited to small employers(<50 EE) and the self-employed

•MSA’s require a high deductible health plan

•MSA high deductible health plan set by statute

•MSA contributions may be made by employer and employee

•HRA may be stand alone or combined with another health plan

•HRA deductible set by employer

•HRA is employer funded

•Carryovers are permitted by both

HRA Plan Design Choices

• Permissable HRA arrangements

• Stand-alone HRA

• HRA coupled with high deductible co-payment health plan

Stand-alone sometime called Sec 105 Direct Reimbursement Plan

• Reimburse any Sec 213d expenses

•Reimburse certain insurance premiums (HIPAA concerns)

HRA Plan Design Details

When tied to high deductible plan employer chooses plan and can limit expenses that are reimbursed

•

Employee who participates receives a 100% employer funded HRA to help offset out-of-pocket expenses and allows for carryover of unused funds

HRA Funding

•HRA can be used to satisfy deductibles and co-pays

•First dollar coverage for preventive services

•HRA cannot be funded by Salary reduction

•HRA deductible insurance tied to HRA may be paid for with salary reduction

•No indirect pre-tax funding (no correlation between salary reduction for major medical plan and HRA amount)

HRA Participants

•Who can participate?

•Common Law employees

• Former employees

• Section 152 tax dependents

•Who cannot participate

• Sole proprietors

• More than 2% shareholder of Subchapter S Corp (and family member employees)

• Partners

HRA Accrual and Carryover

•HRA is subject to discrimination testing•

•Funding amounts and timing of HRA accrual is a plan design feature set by employer•

Carryovers
• Employer decides carryover amounts and limits

• Carryover amounts can be designed to encourage preventative care

• Carryover amounts cannot be discriminatory

Eligible HRA Expenses

•Eligible expenses for reimbursement

• Determined by employer

• Can include all Section 213d expenses or limited to only those expenses that correlate to
the offered health plan

HRA & FSA Ordering Rules

•When HRA & Health FSA are used:•

•By plan design FSA can pay first and HRA last•
•Using FSA first takes advantage of HRA rollover feature

HRA Spend Down Feature

•HRA can be designed to allow terminated employees to use up their remaining account balance•

•Reimbursement for expenses incurred after termination•

•Cash-outs are not allowed•

•Some employers may not want Spend Down feature

HRA Requirements

•Plan funding does not require HRA funds to be set aside in a separate account•

•If funds are set aside in special account ERISA, trust requirement will apply, requiring an annual report

HRA HIPAA Compliance Concerns

•Subject to HIPAA portability requirements•
•Requires certificate of coverage•

•Gives credit for prior coverage or have no preexisting condition exclusion•
•HIPAA non-discrimination requirements•

•Subject to Privacy, Security and Electronic Data Interchange (EDI)

HRA’s and COBRA

•Whocan elect COBRA?

• Covered employee, covered spouse and/or covered dependent child may elect coverage
upon qualifying event

••What is the level of COBRA?

• Qualified beneficiaries may continue the level of coverage in effect immediately preceding
the qualifying event

•IRS notice 2002-45, must continue the maximum reimbursement that was available immediately
preceding the qualifying event

••What COBRA premium to charge?

• What the plan charges similarly-situated beneficiary
Unclear guidance by IRS on premium calculation

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