Health Reimbursement Arrangements (HRA)
A Health Reimbursement Account (HRA) is an account authorized under Section 105 of the Internal Revenue Code. An HRA is a self-funded account that enables employers to purchase a health plan with a higher deductible and self-fund a portion of the deductible. It's one of the most versatile benefits the employer can provide. It can also be utilized to fund specific expenses such as copayments, dental, or vision benefits. It is a health care plan that gets employees thinking more and spending less. Facing rapidly escalating costs, employers are looking for ways to get their employees more engaged in their health care spending. Health Reimbursement Accounts (HRA) provide a viable solution. Equipped with the HRA, employers encourage member engagement to lower overall benefit costs.
How does the HRA work?
As most commonly constructed, HRAs are linked with high-deductible health plans that include preventive care not charged against the deductible and access to information tools that help consumers make informed decisions. Members can use the fund to pay qualified medical expenses or roll over unused funds at year end for future use. Most HRA members who use up the fund then have to meet a deductible for medical expenses before major medical coverage kicks in. With the opportunity to determine how and when their health care dollars are used, HRA members have an incentive to become informed and value seeking health care consumers.
An HRA consists of the following components:
- Health Reimbursement Account - Employer contributes a predetermined amount to each member's account annually. The member may use the funds in the HRA to pay for medical care; covered expenses are paid from the HRA at 100 percent (or percentage amount determined by employer) until the HRA balance is exhausted.
- Employee out-of-pocket or FSA - Once the funds are exhausted in the HRA, the member is responsible for the remaining deductible. The member must satisfy the deductible each year before the medical plan pays benefits; the deductible can be paid with FSA funds, if available.
- Medical Plan - Traditional medical plan benefits are payable after the member satisfies the deductible; coinsurance and breakpoint out-of-pocket maximum levels are available.
Aren't HRAs and other Consumer-Directed Health Plans (CDHPs) really just cost-shifting in disguise?
No, that is not our experience. First, most HRA plans provide 100 percent coverage of preventive care upfront, which is a strong incentive for consumers to get the quality care they need. Second, HRA plan premiums are more affordable than most traditional plans. Third, our experience also shows that employers seldom offer HRAs alone - employees have other coverage choices. However, employees increasingly are ready for the choices and responsibilities of this new age of "consumerism."
What kind of information is available to help consumers make medical decisions that are appropriate for them?
Consumers who take a more active role in health care decision-making need access to information that can help them make good choices. An HRA health plan controls costs by making employees accountable for their decisions, purchases and behaviors and adds an affordable health care program as part of employee's overall compensation package. Members are eligible for first-dollar benefits and can manage money in their accounts effectively. They also offer members more personal choice and flexibility in their health care purchases and decisions.
Designing the HRA
All expenses eligible under IRS Code 213(d) are reimbursable through the HRA; however, the employer may determine which Section 213(d) expenses will apply. Some eligible expenses that an employer may want to include/exclude are vision, dental, and physical therapy. The employer will determine the portion of unused HRA funds, up to 100%, that will roll over to members’ accounts for use in subsequent years. The employer may also limit the rollover dollar amount. The employer may determine the annual allocation into the HRA for each member as well as the total deductible, coinsurance levels (In-network and Out-of-network) and member out-of-pocket maximum requirements. Unused HRA balances may be transferred from another HRA plan if allowed by that plan. The employer may determine the order of payment between the HRA and FSA if both are offered.
Why adopt an HRA?
For employers looking to save money, Health Reimbursement Accounts are often a better choice than funding a Health Savings Account (HSA) which in reality is a cash contribution to participants. A properly implemented HRA allows employers greater control of their benefit dollars, and they can be coordinated and integrated with Flexible Spending Accounts (FSAs).
The three most common types of HRAs are:
Bridge HRA - Funds expenses that are applied to the deductible and cannot be utilized for any other expenses. With a Bridge HRA the employer may adopt a health plan that may have a $2,000 Individual and a $4,000 Family Deductible. The Bridge HRA will help the employees "bridge” the deductible. The employer may fund 50% of the deductible and it can be done as a percentage, they can pay the first $1,000 of the deductible or the back end of the deductible.
Comprehensive HRA - Funds a wide variety of expenses including deductibles, prescription drugs, dental, vision, and over-the-counter medications. They will cover any expenses eligible for reimbursement under Section 213(d) which govern eligible expenses under a Section 125 Cafeteria Plan (Flexible Spending Accounts). Normally they are set up with a two tier level such as $750 for individual coverage and $1,500 for family coverage.
Limited Purpose HRA - Funds a specific benefit such as a prescription drug (Rx) Copayments, a dollar based dental plan, or vision benefits.
Here are some examples: In an effort to reduce fixed cost, an employer may elect to take a higher copayment for prescription drugs and self-fund it down to a lower amount. Let’s say that a copayment from the health plan is a $20.00 for generic and $40.00 for brand name prescription drugs. They may utilize a Limited Purpose HRA and fund an additional $10.00 for each prescription, effectively reducing the employee copayment down to $10.00 for generic and $30.00 for brand name prescription drugs.
Instead of fully insuring a dental or vision plan, the employer may self-fund it in a Limited Purpose HRA.
Dental Plan - May be set up with a $1,000 calendar year maximum benefit. The plan will pay 100% of the first $200, 80% of the next $600 ($480 benefit) and 50% of the next $640 ($320 benefit), which would total a benefit of $1,000. This is only an example, and the dollars or percentages can be in any amount.
Vision Plan - Normally set up with a specific flat dollar amount such as $150.
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