A health reimbursement arrangement (HRA) is a great way for a business to offer a health benefit to their employees without being constrained by the limitation of traditional group health insurance. While HRAs are an affordable and flexible employee health benefit option, there are a number of regulations that employers must follow to keep in compliance with the law. Employers that remain compliant when offering an HRA will avoid costly penalties and the risk of a failed IRS audit.
In this post, we’ll cover the most frequently asked questions businesses have about HRA compliance and some helpful ways to remain in compliance.
What should HRA plan documents include?
The first step in offering an HRA compliantly is to establish a formal plan with the creation of legal plan documents. The purpose of these documents is to define the structure and parameters of the plan and to outline eligibility, allowances, claim procedures, and more.
A complete plan document should include the following:
- Named fiduciaries and plan administrators and their responsibilities*
- Eligibility requirements for the HRA
- Effective dates of participation
- Description of benefits provided and excluded
- How the HRA is funded and how it makes payments*
- Claims procedures
- HIPAA privacy officers and rules relating to the use of protected health information (PHI)
- Information on federal mandates*
- The procedure for amending the plan*
- The procedure for plan termination
*Legally required under The Employee Retirement Income Security Act (ERISA)
In addition to the plan documents, a Summary Plan Description (SPD) should be created and made available to the participating employees. The SPD is a simplified version of the complex language included in the main plan documents. The purpose of this document is to provide employees participating in the HRA an accurate and easy-to-understand description of the plan structure, rules, and procedures. The SPD should be comprehensive enough to inform participants of their benefits, rights, and obligations under the plan.
Where do I get plan documents?
It’s possible for a business to create plan documents on their own, but it can be difficult to ensure each of the requirements is sufficiently represented. Alternatively, a business can work with an attorney or law office to draft the documents. This can be rather expensive and likely includes no compliance support beyond plan document generation. This could result in a company receiving a formal plan document without a complete understanding of how to appropriately follow it.
The third option is for a business to work with an HRA benefits advisor or administrator that can provide documents and assist the business in implementing the formal plan. This is likely the best option for most companies as it removes the burden of creating a complex legal document and provides the business a resource regarding compliance related matters.
What are the HRA employee privacy rules?
Regardless of company size, HIPAA Privacy Rules regulate the conditions under which employee’s protected health information (PHI) can be shared with the company. The rules state businesses offering an HRA plan must adopt certain written personal health information (PHI) privacy procedures.
The business’s written privacy procedures must include safeguards for the administration of PHI, physical security of such information, and electronic and other types of technical security. They should establish a process for employees to follow when filing complaints and for dealing with complaints. They must also determine individuals in the company to be designated as HIPAA privacy officers, who will directly handle employees’ PHI. Finally they must take any measures necessary to see that PHI is not used for making employment or benefits decisions.
These rules can be followed by a business administering an HRA on their own, but like other aspects of HRA compliance, they can be difficult to adhere to without the help of an HRA benefits advisor or software administrator.
What are the HRA substantiation requirements?
The IRS requires that employees being reimbursed through an HRA submit proper documentation verifying their claim for reimbursement. This supporting documentation must be saved on file for seven years.
Documentation can be provided directly to the company’s designated privacy officers, or through a third party. Examples of documentation that can be used to substantiate expenses are an itemized receipt, an explanation of benefits, or a detailed billing history.
Failure to substantiate an expense or keep the required documentation on file could result in a negative result in the case of an IRS audit.
Can an HRA satisfy the employer mandate?
The passing of the Affordable Care Act in March 2010 came with a new requirement for employers called the employer shared responsibility provision, or the employer mandate. The mandate requires employers with 50 or more full-time equivalent employees to offer a health plan that meets minimum essential coverage to 95 percent of FTE employees and their dependents. The coverage must also meet the ACA’s minimum value and affordability requirements.
In the past, HRAs have most often been implemented by small businesses that are not subject to the employer mandate. By nature, an HRA was unable to satisfy the requirements of the employer mandate, making them a poor option for large employers wanting to avoid penalties. This changed with the creation of the individual coverage HRA (ICHRA), newly available as of January 2020.
Unlike other HRAs, the ICHRA, when implemented correctly, can satisfy the employer mandate requirements for large employers. Employees participating in the ICHRA must be enrolled in qualified individual health insurance coverage. This takes care of the MEC and minimum value requirements. Next, an employer offering an ICHRA to meet the employer mandate must ensure their contributions are affordable. An affordable ICHRA contribution ensures the cost of health insurance for an employee isn’t more than 9.78 percent of their household income, using the lowest-cost silver plan on their local exchange as the standard. To meet this requirement, the monthly premium for the lowest-cost silver plan, less the monthly contribution being offered, shouldn’t exceed 9.78 percent of the employee’s household income for the month.
As long as they are following other aspects of HRA compliance, an employer offering an ICHRA with affordable contributions for employees can be assured they are meeting the employer mandate and avoiding other penalties.
Knowing the best ways to offer a compliant HRA will allow a business to provide employees a worthwhile benefit while protecting themselves from any potential penalties. While it’s possible for a business to administer an HRA on its own, self-administration comes with inherent difficulties and risks.
Partnering with a trustworthy third-party benefits advisor or software administration platform puts businesses in a more comfortable position by eliminating the administrative difficulties and helping to alleviate risk through ensured compliance.
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