What is it?

1. What is it? Employer reimburses covered employees for specified medical expenses directly from corporate funds HRA is used • as a substitute for health insurance • as a supplement to provide payments for medical expenses not covered under company’s health insurance plan • to pay for medical expenses in excess of company’s health insurance plan

2. When is it Indicated? • Closely held corporation and shareholders and family are primary or only employees • In professional corporation where only employee is high income professional or where are few other employees • Employer would like to provide employees with medical benefits beyond basic medical

3. Design Features • Plan adopted by corporate resolution specifies • group of employees covered • types of medical expenses that will be reimbursed • any limits or conditions or payment by the company • Employer reimburses employee for claims covered under plan

4. Design Features • Benefits tax-free if • qualify for medical expenses under IRS code • plan is nondiscriminatory • Broad range qualified medical expenses • Plan can be fully funded or insured • Insurance contracts provide (1) administrative services, (2) claims evaluation, (3) stop loss coverage

5. Tax Implications • Employer may deduct 100% of • cost of benefits paid to employees under plan • plan administrative expenses • cost of any insured stop loss coverage • Annual employer deductions are limited • Benefits tax-free unless plan is discriminatory • Employee eligible for itemized medical expense deduction; limited to amount by which total of all eligible medical expenses exceed 7.5% of taxpayer’s adjusted gross income

6. Tax Implications: Nondiscrimination Rules If fail nondiscrimination tests, benefits taxable to highly compensated employees Two tests • coverage • benefits

7. Tax Implications: Nondiscrimination Rules Coverage test – plan must benefit • 70% or more of all employees • 80% or more of all employees who are eligible to participate in the plan if at least 70% of all employees are eligible to participate OR • a classification of employees, established by employer, that does not discriminate in favor of highly compensated employees

8. Tax Implications: Nondiscrimination Rules Who can be excluded from coverage tests? • employees with less than 3 years of service • employees under age 25 • part-time or seasonal employees • employees in a collective bargaining unit if have good faith bargaining on health plan issues • nonresident alien employees who received no U.S. income

9. Tax Implications: Nondiscrimination Rules Benefits test All benefits provided for highly compensated employees under the plan must be provided for all plan participants

10. Tax Implications: Nondiscrimination Rules Who can be excluded? • Employees with less than 3 years of service • Employees under age 25 • Part-time or seasonal employees • Employees in collective bargaining unit having good faith bargaining on health plan issue • Nonresident alien employees who received no U.S. income

11. Internal Revenue CodeEligibility and Coverage Requirements HRAs must comply with requirements for group health insurance regarding: • limits on exclusions for preexisting conditions • conditions for which participants cannot be excluded or charged a higher premium • length of hospital stay for childbirth • benefit limits for mental illness

12. Internal Revenue CodeEligibility and Coverage Requirements Penalty for noncompliance is same as COBRA, usually $100 per day for each individual up to a total of the lesser of • 10% of the employer’s payments under group health plans for the previous year or • $500,000

13. COBRA Continuation Coverage Under COBRA, an employer must provide option to continue an employee’s existing health plan coverage (incl. dependent coverage) for 36 months after various qualifying events • death or divorce of employee • employee eligible for Medicare • bankruptcy • child ceases to be dependent for plan purposes

14. COBRA Continuation Coverage Health plan coverage must continue for • 18 months if terminate employment (except for gross misconduct) or reduce employment hours • 29 months if termination is for disability

15. COBRA Continuation Coverage Continuation coverage can terminate before the 36, 29, or 18 month period if • employer terminates health plan for all employees • beneficiary does not pay own share of premium • beneficiary covered under another health plan, unless a preexisting condition is excluded

16. COBRA Continuation Coverage Former employee’s or beneficiary’s share of premium under COBRA cannot be more than • 102% of premium paid by those without qualifying event • 150% of premium after 18th month of continuation coverage for disabled Fine for noncompliance is $100 per day

17. ERISA Requirements An employer’s HRA is a welfare benefit plan under ERISA and subject to ERISA requirements

18. Discussion Questions • Can an HRA be designed to exclude rank-and-file employees by funding the HRA though a health insurance contract? • What are the advantages and disadvantages of designing an HRA that discriminates by covering only specific executives?