Serving professionals in the fields of

Human Resources, Payroll, Benefits, & IT

AUGUST  2002                                                                                                     VOLUME 1, ISSUE 2

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Observation Deck

Putting Out Fires

New Product Releases

SAP R/3 Enterprise

Compliance Due Diligence & Guidance Information

Human Resources

Electronic Technologies Requirements Expand for People with Disabilities

Benefits

Legal Experts Explain Impact of HRAs

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In case you missed this one, Employee Benefit News recently published a great article on Health Reimbursement Arrangements (HRAs).  So why recreate the wheel?  We’re being informative here, so we’ll give them the credit and pass the info on to you. 

Employers considering sponsorship of a consumer-driven health benefits plan must familiarize themselves with recent Internal Revenue Service (IRS) guidance on health reimbursement arrangements (HRAs). Employee Benefit News' 2002 Benefits Management Forum & Expo, being held Sept. 29 to Oct. 2 in Dallas, Texas, features educational programming on this critical development concerning CDH. One session, on Monday, Sept. 30, is titled "HRAs Usher in New Age of Health Care." The session will be led by John Hickman, Ashley Gillihan and Thomas Schendt, employee benefits attorneys with Alston & Bird -- one of the few U.S. law firms that has participated in the critical development of federal CDH regulations from the very beginning. EBN recently caught up with these experts for additional information on this topic and the Alston & Bird presentation at BMF&E.  

EBN: How would you characterize the importance of the IRS guidance for the growth of consumer-driven health plans? Do you think this is this truly a watershed event?  

Hickman: The IRS HRA ruling is truly a landmark decision that will usher in a new era of consumer-driven health care. Many in the employer community have been solidly behind CD health care concepts -- empowering employees to manage their own health care expenditures by giving them a stake in expenditures. The critical missing element was uncertainty with regard to how arrangements that encompass a carry-over account (where unused benefits can be accessed in future years) should be taxed. The IRS ruling has now cleared the air and favorably resolved this issue. This is clearly just the "tip of the iceberg" with regard to the future development of even more innovative CD health arrangements.  

EBN: Could you cite an example of the policy issues behind the IRS ruling on HRAs?  

Schendt: One of the biggest concerns that the IRS had to grapple with was whether the CD health care concept could undermine the philosophy behind Section 213 of the tax Code - i.e., health expenses are generally personal in nature.  

Back in 1984, the IRS addressed the proliferation of abusive "zero balance reimbursement arrangements" (so-called ZEBRA accounts) that ostensibly enabled employees to "transform" otherwise taxable W-2 compensation into tax free health care reimbursements. This is why we have the current "use-it-or-lose-it" rule for health FSAs. The IRS had to address how to facilitate the CD health care concept without enabling the conversion of otherwise taxable pay to tax free health care. The ruling addresses this concern by requiring that only employer funds make their way into the HRA account.  

EBN: Will HRAs as outlined by the IRS be able to co-exist with flexible spending accounts (FSAs) for employers that currently offer them?  

Hickman: One of the surprising aspects of the IRS ruling is that the IRS specifically allowed employers to have both an employer-funded HRA account and an employee pre-tax funded health FSA. By plan design the arrangements can be structured so that the FSA benefits can be used first, preserving unused HRA funds for future medical expenses (typically, a Health FSA must be the payer of last resort).

Given that HRAs are funded by employers, and many employers may want to keep a handle on their HRA exposure (e.g., by keeping eligible HRA expenses closely related to the eligible medical expenses under the major medical health coverage) employee-funded FSAs will still be an important component of any comprehensive benefit plan.  

EBN: Won't there be overlap between the HRA guidance with requirements of other federal laws and regulations, such as HIPAA?  

Gillihan: HRAs are "health plans" subject to all of the regulatory requirements that apply to other health plan arrangements - HIPAA, COBRA, ERISA, etc. Thus, for example, HRA administration must fully comply with HIPAA's electronic data interchange (EDI) and privacy requirements. Similarly, the HRA must issue a HIPAA certificate and COBRA notice to individuals who lose coverage eligibility. Among the ERISA concerns are reporting and disclosure, funding and ERISA trust requirements. Although this sounds like a lot to address, HRA administration will not be much more complicated (if at all) than any other health plan administration.  

EBN: What else might attendees at your BMF&E presentation expect? Will they gain help in structuring a compliant defined contribution arrangement for their own organizations?  

Hickman: We will provide attendees a complete roadmap of critical compliance issues that they should address. With eyes-wide-open HRAs will be an important benefit for years to come that will help usher in the new age of CD health care.