HRAs: Make Sense… Brokers & Employers Would be Wise to Take Another Look!

Consumer-Driven Health Care (CDHC) Solutions like Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA) have helped millions of Americans to more consciously and cost-effectively manage their health care. Recently, health care spending accounts have become the topic of much debate amid the push for health care reform. Proponents of health care spending accounts argue that these solutions have played a major role in reducing health care costs for many Americans, and that placing limitations on such solutions (such as the proposed $2,500 cap on FSA contributions) would be a costly mistake.

Throughout the debate, and even before health care reform was at the top of the agenda, surprisingly little has been said about another less common—but still equally compelling—CDHC Solution: Health Reimbursement Accounts (HRA). HRAs are similar to FSAs and HSAs in that they allow employers to set aside tax-advantaged dollars that can be used by participating employees to pay for qualified health care expenditures. Unlike FSAs or HSAs, HRAs are solely employer-funded, and contributions to an HRA cannot be made through employee salary deferrals under a cafeteria plan. HRA contributions are not included in an employee’s income, so employees do not pay taxes on amounts contributed to their HRA accounts. One of the major benefits of the HRA compared to the FSA or HSA is the flexibility that it offers to the employer. Employers choose how much to contribute into their employees’ accounts, and employers also define the health care expenditures that are deemed qualified for tax-free reimbursement. HRA distributions are tax-deductible for the employer (when used for a qualified expense according to the plan), and, like an HSA, unused HRA funds roll over from year to year (provided the plan is set up to allow rollovers).

The fact that unused funds can roll over from year to year provides an incentive for employees to save toward future health care expenses and manage their funds wisely. It also acts as an important benefit to participants when comparing the HRA to the more popular FSA. From an employer’s perspective, the HRA also offers a strong advantage over the HSA. Since the account is employer-funded, the employer retains unused HRA funds should an employee leave the company. Better yet, HRA funds do not have to physically “sit” in an account; rather, the employer can simply report HRA funds as a liability on the balance sheet until a qualified claim is transacted. This is an important, but often overlooked benefit of the HRA that provides greater flexibility to the employer, frees up potentially large amounts of cash that can be used for other operations, and sacrifices zero benefit to the participant.

The advantages of an HRA might lead one to believe that it should be the standard, and not the exception, when it comes to CDHC plans. And yet, although HRAs have been around since 1954 and were reintroduced to the marketplace by the IRS in 2002, they have not taken off as quickly as the FSA or HSA. There are two probable reasons for this trend. First, many brokers have been hesitant to present HRAs to their clients because of the additional complexity many associate with an HRA plan. The second reason is that, until recently, there have been very few processing platforms capable of delivering efficient HRA administration to the employer.

But with demand comes innovation and opportunity, and brokers and employers would be wise to take another look at the HRA. As insurance premiums rise and health care reform efforts persist, there is no doubt that the HRA will become an increasingly attractive option. Employers and those who work in the benefits industry can capitalize on this valuable benefit by taking advantage of the new technology solutions that make HRA administration easier and more affordable than ever.



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