Editor's Note: This article was written prior to Technical Release 2013-03 and parts of the article may no longer be applicable to stand-alone HRAs. For an updated article, see: Defined Contribution Health Plans - The 3 Plan Design Questions.
Health Reimbursement Arrangements (HRAs) are simple in nature. However, there are many custom plan design options that give employers flexibility and control over their health benefits. While not an exhaustive list, we've outlined eight key HRA plan design options.
HRA Plan Design #1: Type of HRA
First, what type of Health Reimbursement Arrangement (HRA) will you offer? There are two main types of HRAs:
Stand-Alone HRA: A stand-alone HRA is not linked to a major medical plan, rather the HRA is the health benefit. Employers can reimburse for individual health insurance premiums, as well as other eligible out-of-pocket medical expenses.
Integrated HRA: The most commonly-known type of HRA is one that is integrated with a high deductible major medical plan. The HRA is offered only to those who take the major medical coverage.
This article focuses on stand-alone HRAs.
HRA Plan Design #2: HRA Allowance & Frequency
What amounts would you like to allocate for each employee, and at what frequency will they be available (monthly or annually)?
For example, an employee could have a $100 monthly HRA allowance, made available at the beginning of each month. Or, an annual allowance of $1,200 made available at the beginning of the plan year.
There is no minimum or maximum HRA contribution amounts, and all HRA funds are notional (paid only after the medical expense is substantiated).
HRA Plan Design #3: HRA Classes & Eligibility
Will you have one benefit level for all employees, or give different HRA allowances by class of employee?
With HRA class design, you can allocate different HRA allowances based on bona-fide job criteria such as job description, length of stay with the company, geographic location, part-time or full-time status, etc. ERISA and HIPAA allow this, as long as all "similarly situated" employees are treated equally.
HRA Plan Design #4: Annual Rollover of Unused Funds
What will happen to employees' unused HRA funds at the end of the plan year?
You have full control over this. An HRA can be designed with full rollover of unused funds, a capped rollover of unused funds (a maximum amount to rollover), or no rollover of unused funds ("use it or lose it").
HRA Plan Design #5: HRA Eligible Medical Expenses
What type of expenses do you want the HRA to reimburse?
The IRS sets the definition for medical expenses that can be reimbursed through an HRA (see Section 213(d) of the Internal Revenue Code). From this list you can limit expense categories not to reimburse. Categories may include health insurance premiums, doctor's visits, hospital care, pharmacy, mental health, physical therapy, etc.
HRA Plan Design #6: HRA "EOB-Only" Requirement
Do you only want to reimburse expenses that were covered by a major medical plan?
If so, you can require that all expenses are submitted with an Explanation of Benefits ("EOB") which shows that the medical expense was covered under insurance. This is most common with an integrated HRA (we call it GroupHRA), but can be applied to any HRA plan.
HRA Plan Design #7: HRA Cost-Sharing Options
Would you like employees to share in the cost of their medical expenses?
If so, you can design your HRA plan with an HRA co-insurance and/or deductible. For example, with an HRA co-insurance you could reimburse 80% of all eligible medical expenses. With an HRA deductible, employees could be required to pay out-of-pocket a certain amount per plan year before HRA funds are available to them.
HRA Plan Design #8: Expense-Specific Maximums
Is there a certain type of expense you want to limit or cap?
For example, within an employees' annual HRA allowance, you can design their HRA to limit the amount reimbursed for certain categories of health care expenses. For example, a business could offer a $2,000 HRA annual allowance, with an annual limit of $500 for dental expenses.