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Dec 2002
01
December 01, 2002

Health Reimbursement Arrangements: Health Care Cost Containment for Employers

The IRS issued much-anticipated guidance on so-called defined contribution health care this summer, resolving key issues surrounding personal care account arrangements. These products, which typically include high deductible health plans in conjunction with personal care accounts, have been developing in the marketplace without clear parameters from the IRS. These innovative products primarily are used to overcome limitations of flexible spending accounts (FSAs), including the "use-it-or-lose-it" rule and the inability to reimburse employees for health insurance premiums. Employers now can establish accounts where funds are carried over from year to year and used for premiums that retain favorable tax treatment.

The IRS guidance came in the form of Notice 2002-45 and Revenue Ruling 2002-41. The IRS dubbed these arrangements "Health Reimbursement Arrangements" or "HRAs." Overall, HRAs allow greater flexibility than FSAs and provide employers with various plan design choices.

HRA Features

  • employer contributions only (no employee contributions permitted)

     
  • employees can carry over unused amounts (no "use-it-or-lose-it" rule)

     
  • can use for paying health insurance premiums

     
  • can be established in tandem with group health plan and/or FSAs

     
  • can offer to retirees and terminated employees

     
  • coverage term can be less than one year

     
  • can reimburse medical expenses of current and former employees and their spouses and dependents

HRA Limitations

  • reimburses only qualified medical expenses

     
  • expenses must be substantiated

     
  • expenses must not be previously deducted

     
  • cannot reimburse expenses incurred before HRA was established

     
  • cannot reimburse expenses incurred before employee is enrolled in HRA

     
  • no double-dipping into both an FSA and an HRA

     
  • cannot be funded by salary reduction

Because the IRS relied on Code Section 105 to endorse HRAs, nondiscrimination rules for self-insured plans apply. In addition, HIPAA, COBRA, and ERISA likely apply to HRAs, but the IRS has not addressed how these laws will affect HRAs.

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Warner Norcross & Judd is a full-service law firm with offices in Grand Rapids, Metro Detroit, Holland and Muskegon. Because each situation is different, this information is intended for general information purposes only and is not intended to provide legal advice.
 

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