Health Reimbursement Arrangements (HRA) are commonly used by employers in Eastern Pennsylvania and across the country to reduce health care costs.  A common use of these plans among small employers is to adjust their group health insurance plan by raising the plan’s deductibles, and then offering a reimbursement arrangement to employees to reimburse the increase in deductible.  The expectation is that the reimbursements paid by the employer will be less than the premiums saved by moving to the higher deductible plan.    Health Reimbursements are paid for solely by the employer, with no employee contribution through salary reduction.  Essentially, the employer is setting up a self insured health insurance plan that is layered below the group’s higher deductible health insurance program.  If the group’s claims experience is good, substantial premium savings may result.  In analyzing whether or not the HRA is likely to be beneficial, actual premium rates must be compared for the group’s current program versus higher deductible options, in light of the maximum and probable health reimbursement projections.   There is often confusion about the names by which plans are referred to.  Some advisors talk about Medical Expense Reimbursement Plans (MERP) when referring to HRA’s, and others use this term referring to Flexible Spending Accounts (FSA), but there is no definition in the Internal Revenue Code for a MERP.  The proper IRS terminology for the plan discussed here is an HRA.   Many employee benefit advisors advocate these plans, but few are knowledgeable about the technical requirements of running these plans correctly, in compliance with Federal IRS and Department of Labor Regulations.  As a result, we frequently encounter plans that are out of compliance.  The five most common compliance issues are these:  

1. Failure to have a plan document.  HRA’s are subject to the Employee Retirement Income Securities Act of 1974 (ERISA), and as such, a summary plan description is necessary to explain to employees what is eligible for reimbursement.  “When it comes to having a plan document, I tell employers, ‘you want one’, because if there is ever an issue, the plan document is what controls what happens,” says employee benefits attorney Desiree F. Fralick, Esq., of the Mazza Law Group, PC, in State College.
2. Failure to offer reimbursement to employees on COBRA.  HRA is a COBRA eligible benefit, and as such, terminated employees are eligible.  Many groups who are subject to COBRA fail to offer this benefit to terminated employees.  Groups may charge those employees a premium for the HRA benefit, but that charge must be based on the actuarial and expected cost of their reimbursement.
3. S-Corporation Owners taking tax free health reimbursements under an HRA and failing to report it on their W-2.  Shareholders of an S-Corp who own 2% or more of the company stock must include the value of the HRA fringe benefit on their W-2, subject to federal and state income taxes, although these wages are not subject to social security and Medicare taxes.  
4. Failure to comply with the Health Insurance Portability and Accountability Act of 1996 (HIPAA) to maintain the privacy of employees’ “protected health information”.  Many employers administer HRA’s themselves.  With employees submitting protected health information to employers to qualify for reimbursement, employers cannot maintain that they do not have access to and are not aware of employees’ protected health information.  As such, they are subject to HIPAA’s many requirements to protect the privacy of this information, including the requirement to appoint a privacy officer, keep the health information in a separate, locked file not accessible to those who do not require access, and maintaining policies and procedures to protect the privacy of the information.  These requirements can be avoided relative to the HRA if employers simply hire an outside firm such as ours to handle the administration of their HRA.
5. Moving to a qualified “High Deductible Health Plan” that subjects physician’s office visits and prescription drugs to the plan’s deductible.  While there is nothing wrong with doing this from a technical standpoint, from a practical standpoint, it dramatically increases the number of claims that are eligible for reimbursement and makes the operation of the plan very difficult for employees.  Instead of only submitting occasional claims for hospitalizations, tests, and the like, employees must now submit every doctor visit and every prescription for reimbursement.  It is normally preferable to select a more typical plan that provides physician’s office visit and prescription drug co-pays to employees, while subjecting other claims to a high deductible.

David S. Coult, CFP, CLU, ChFC is the President of Milestone Financial Associates, LLC, an employee benefits firm in Kutztown, Pennsylvania, on the web at www.milestonefa.com.  He can be reached via email at This e-mail address is being protected from spam bots, you need JavaScript enabled to view it or by calling 1-800-342-1146.