Health Reimbursement Arrangements, also referred to as Health Reimbursement Accounts or HRAs, provide small businesses an affordable health benefits solution. HRAs are growing in popularity because they allow small businesses to provide health benefits at an affordable cost. A common question from small businesses is "Who can administer the Health Reimbursement Account?"
This article examines the rules of HRAs and who can administer the HRA in a compliant way.
To understand who can administer an HRA, it is first important to understand the basic rules of HRAs. HRAs are authorized under Section 105 of the Internal Revenue Code, as well as through the Small Business Healthcare Relief Act, and are a type of self-funded, tax-favored plan that may be offered either in conjunction with a group health plan, or as a stand-alone plan to reimburse qualified out-of-pocket medical expenses and insurance expenses.
With a Small Business HRA, a business would use the HRA to reimburse employees for qualified medical expenses and individual health insurance premiums, instead of offering a group health insurance policy.
To receive the tax benefits of an HRA, and to be compliant with various regulations (outlined further below), the Internal Revenue Service (IRS) has defined the rules and guidelines for an HRA in IRS Notice 2002-45. Under these rules:
An HRA is paid for solely by the employer and cannot be funded through employee salary deduction (in other words, it is not a cafeteria plan).
An HRA may only reimburse employees during their effective dates in the HRA plan.
An HRA can reimburse for eligible medical expenses and health insurance premium amounts, as defined in IRC Section 213(d)(1)(D).
Each eligible medical expense must be substantiated.
Reimbursements are generally excludable from the employee's gross income under Internal Revenue Code Sections 106 and 105. Reimbursements the business pays are tax-deductible.
Who Can Administer an HRA?
For a business to administer an HRA, they need to have legal HRA Plan Documents in place. An HRA Plan Document describes the HRA plan's terms and conditions related to the operation and administration of the HRA. Since an HRA is subject to ERISA, a legal HRA plan document must be provided in writing. If an HRA exists without a written HRA Plan Document, the business is out of compliance. In addition to the HRA Plan Document, a business needs to make sure it has certain safeguards in place to stay compliant with the IRS, ERISA, HIPAA, and Affordable Care Act (ACA).
Because of these compliance reasons, and for ease of use and time savings, most businesses use a third party to administer the HRA. Businesses have two main options for compliant HRA administration: a traditional third-party administrator (TPA) or an HRA software provider.
A traditional TPA will help a business: set up the HRA, create and distribute HRA Plan Documents, manage all HRA funds, review claims for reimbursement, keep medical receipts on file, and issue reimbursements to employees. Traditional TPAs require prefunding of the HRA allowances.
An HRA software provider helps a business: set up the HRA, create and distribute HRA plans electronically, provide a quickbooks-like tracking of HRA funds, review claims for reimbursement, keep medical receipts on file electronically, and notify the employer (through the software) when to reimburse employees via payroll. HRA software does not require prefunding of HRA allowances, and is not a fiduciary.
The other way businesses occasionally administer an HRA is by self-administration.
Self-administration: Technically, a business can self-administer its own HRA, but failure to comply with the minimum HRA federal administration requirements is common without utilizing proper HRA software or a TPA. Businesses that self-administer are frequently out of compliance with HRA, ERISA, HIPAA, COBRA, and ACA regulations, and businesses can face costly fines for being out of compliance. And, if a business puts into place all of the safeguards needed for compliance, the administrative cost likely outweighs the benefits of the HRA. Read here for more about self-administering an HRA here.
So, what are the HRA compliance requirements discussed above?
1. Tax savings and IRS compliance: The IRS requires that a formal HRA (with HRA Plan Documents) be established in order for HRA reimbursements to be tax-free for the employer and employees.
2. Federal compliance: The federal government has guidelines for employers who want to contribute to employee's IRS-qualified medical expenses:
HIPAA (Medical Privacy): Employees’ medical information needs to be kept HIPAA-protected, and all medical documentation stored in compliance with HIPAA for 7 years, as required by the IRS for audit purposes. Employers should never see employees’ medical information, or even the type of medical expenses, to stay HIPAA compliant and nondiscriminatory.
ERISA: Under ERISA, employers are not allowed to “endorse” a specific individual health insurance plan. When offering an HRA, the employer should not know the details of individual health insurance plans purchased by employees, or even if they are seeking reimbursement for a health insurance premium (only that it is a qualified medical expense allowed by the HRA).
3. ACA/health-care reform: The ACA has introduced new requirements for HRAs, including how benefit information is presented to employees (Summary of Benefits & Coverage, or SBC), new reporting forms (720/5500) and new plan design requirements (e.g., compliance with prohibition on annual limits).
What questions do you have about who can administer an HRA? Leave a comment below and we'll answer.