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 Health Reimbursement Arrangements (HRA's) - also known as 'Consumer Driven' heath plans have emerged as one of the best ways for businesses to provide health benefits to their employees. HRA plans are for employees and Owner/Employees of C-corporations. Their counterpart 'HSA Plans' or 'Health Savings Accounts' are for Sole Proprietors, Partners, LLC's, PLLC's, Principal's of S-corporations and individuals (who are not claimed as a dependent on someone else's tax return). With the spiraling costs of health insurance over recent years, something had to happen to break the vicious cycle. One of the main problems was the system itself.
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Employer's pay the majority of health care insurance premiums and employees are the end users and consumers of health care services. This presents a fundamental problem anytime one party pays for a product or service and another party uses the product or service, they are disengaged. This is how HRA plans get employees actively involved in deciding when and how they access their health insurance benefits. HRA plans are designed using Qualified 'High Deductible Health Plans' (HDHP) $1,500-$2,050 individual calendar year deductible is about average. Employers and employees share the deductible expense usually before the insurance company pay's benefits. Employers generally reimburse some level of the this deductible and employees pay the difference. Depending on the plan design the employer reimbursement can be:
- First dollar
- Sandwiched between the employee and insurance company deductibles
- The last deductible paid
For example if a $1,500 deductible plan were selected, the employer could choose to reimburse the first $750.00, then employees would be responsible for expenses from $751-$1,499. Once health care expenses exceed $1,500 the insurance company begins reimbursement based on the plan design. Another example using the same dollar amounts would be where the employee pays the first $250 of expenses and then the employer pays the next $500 of expenses ($750 total). Then the employee pays the next $500 ($1,250 total), then the employer pays the next $250 to complete the $1,500 deductible. At that point the $1,500 plan deductible is met and the insurance company then reimburses healthcare expenses according to the plan design. A IRC Section 125 Flexible Spending Account 'FSA' plan is normally partnered with a HRA plan, so that the employees share of healthcare expenses (which are not reimbursed from either the employer or insurance company) can be paid using pre-tax dollars.
However unlike dollars contributed to a FSA plan, the dollars in a HRA plan are not a 'use it or loose it' situation! Dollars not used in the employees HRA account can be accumulated year to year and used to pay future eligible expenses. Thus the term 'Consumer Driven' health plan has emerged, because the employee now decides if they are going to use the dollars in their HRA account to pay for health care services. Compared to traditional health care services were the employee simply used the services 'cart blanche' and the employer sees the increase on their next health care renewal.
Employees do not see much change in the level or way health care services are delivered. HRA plans can use either traditional, PPO and/or HMO plan designs. In fact, everything may appear to be exactly the same, except the way health care services are paid for. Employees no longer pay office visit co-pays, your ID card is presented at an office visit and the entire cost of the office visit is electronically billed. Employees still receive an 'Explanation of Benefits' (EOB) detailing the claim, however a HRA Statement of account is also included in the EOB tracking the amount of money in the employees account. The EOB details how the claim is paid using employer, employee or insurance company dollars. Most plans offer a master card based Smart Debit Card, where employees HRA funds can be easily accessed to pay for eligible expenses at the point of service.
The bottom line is HRA plans get employees more involved in making their own healthcare decisions and more aware about the cost in doing so. The trickle down effect from this we have found is abuses and nonessential healthcare costs are reduced, as employees are more educated and involved in their own health care delivery system. This directly reflects the renewal increases we are seeing in these plans. We have seen that the annual increases in HRA Health Plans are far below the industry average for Traditional health plan funding arrangements. Over time, this adds up to a big savings for all parties involved!
Many HRA plan Providers offer a health and wellness program that rewards employees who make healthy lifestyle choices. These programs give members financial incentives and the chance to receive tangible rewards for making smart healthcare decisions. Including special health club rates, vacation discounts, airline miles and more. These programs can help members improve their overall health and save dollars down the line. It's a feature that also helps employers recruit and retain talented employees!
Kelley Insurance & Financial is on the cutting edge of all your employee benefits needs and is way ahead of the curve when it comes to HRA and HSA plans. Call our office today or click here for a HRA/HSA quote and bring your companies benefit program into the 21 Century!
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Health Savings Accounts (HSA's) - also known as the 'Medical IRA' is the HRA counterpart as stated above for Sole Proprietors, Partners, LLC's, PLLC's, owner's of S-Corporations and individuals (as long as nobody else claims you as a dependent on their tax return). The concept works primarily the same, however owners of HSA plans make the contribution to their HSA account themselves and deduct the contribution (up to the stated maximum) on their own tax return. Which is why the plan is referred to as a 'Medical IRA'. HSA's also must use Qualified 'High Deductible Health Plans'.
Maximum deductible contributions to a HSA plan for 2005 are listed below.
The monthly HSA maximum contribution for an eligible individual with self-only coverage under a high deductible health plan (HDHP) is 1/12 of the lesser of:
- The HDHP’s annual deductible
- $2,650 (up $50 from 2004)
The monthly HSA maximum contribution for an eligible individual with family coverage under an HDHP is 1/12 of the lesser of:
- The HDHP’s annual deductible
- $5,250 (up $100 from 2004)
One of the big features for HSA accounts is the funds can be invested just like any other IRA or Retirement plan assets and all earnings are tax-deferred. Therefore, you may invest HSA account proceeds in securities, fixed and/or guaranteed investments, etc. In addition, as long as the funds are withdrawn to pay for eligible expenses ,withdrawals are tax and penalty-free. You may withdraw funds to pay the following expenses at any time:
- Expenses that apply towards your 'HDHP' calendar year deductible
- Qualified Long Term Care insurance
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To pay for eligible unreimbursed expenses that your health plan doesn't cover such as
- Dental Care
- Orthodontic Care
- Vision Care
- Certain alternative medicines
- Certain nonprescription drugs
For 2005 HSA eligibility, an individual’s HDHP cannot have an annual deductible that is less than $1,000 for self-only coverage, or $2,000 for family coverage and must limit annual out-of pocket expenses (deductibles, co-payments, and other amounts, but not premiums) to no more than $5,100 (up $100 from 2004) for self-only coverage and $10,200 (up $200 from 2004) for family coverage.
Catch-up contributions for 2005 increase to $600 (up from $500 in 2004) for HSA owners at least age 55 and not enrolled in Medicare. You may view the IRS press release updating 2005 maximum HSA contributions by clicking here. You may view IRS Publication 502 - Medical and Dental Expenses by clicking here.
Beginning January 1, 2005, an HSA MUST be established with a Qualified Trustee or Custodian BEFORE qualified expenses can be eligible for reimbursement. Insurance companies and banks (including a similar financial institution as defined in section 408(n)) can be an HSA trustee or custodian. In addition, any other person already approved by the IRS to be a trustee or custodian of IRAs or 'Archer MSA's' is automatically approved to be an HSA trustee or custodian. Other persons may request approval to be a trustee or custodian in accordance with the procedures set forth in Treas. Reg. § 1.408-2(e) (relating to IRA nonbank trustees). For additional information concerning nonbank trustees and custodians, see Announcement 2003-54, 2003-40 I.R.B. 761. Most insurance companies offer this service along with their HSA health plans at no additional charge.
Many of these Trustee and Custodians offer either checks and/or a Smart Visa/Mastercard based Debit Card, in order to access your HSA funds at point of service. An account statement is provided by the custodian (usually monthly), like any other bank or IRA account statement detailing your beginning and ending HSA account balances, the activity of your account for the month, etc.
Kelley Insurance & Financial is your premier HRA/HSA Solutions Provider. We make understanding and implementing these plans easy. Call our office today or click here for a HRA/HSA proposal for your firm and bring your benefit plan into the 21 century.
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