HRAs: Excepted Benefits and Unused Amounts When Employees Leave

Question: What is an excepted benefit Health Reimbursement Arrangement (HRA) or EBHRA?

Answer: EBHRAs are limited-dollar HRAs that qualify as excepted benefits and thus aren’t subject to the Public Health Service Act mandates. They can be offered by employers of any size that want to provide an account-based supplement to their group health coverage without being constrained by the requirements for integrated HRAs.

EBHRAs are subject to the following requirements:

• Limited-Dollar Benefits. Under an EBHRA, up to $1,800 (indexed for cost-of-living changes) can be newly available to each participant for each plan year to reimburse eligible medical expenses. (Carryovers permitted under the EBHRA are disregarded when applying the limit.) Amounts made available under other HRAs or account-based plans provided by the employer for the same period will count against the dollar limit unless those arrangements reimburse only excepted benefits.
• Reimbursements. An EBHRA may reimburse out-of-pocket medical expenses other than premiums for individual health coverage, Medicare, or non-COBRA group coverage. Premiums for coverage consisting solely of excepted benefits can be reimbursed, as can premiums for short-term limited-duration insurance (STLDI) coverage. Although, under certain circumstances, federal agencies may prohibit small employer EBHRAs in a particular state from allowing short-term limited-duration insurance premium reimbursement.
• Other Coverage. The employer must make other nonexcepted, non-account-based group health plan coverage available to the EBHRA participants for the plan year (enrollment in the other group health plan is not required). Thus, participants in the EBHRA could not also be offered an individual coverage HRA (ICHRA).
• Uniform Availability. An EBHRA must be made available under the same terms and conditions to all similarly situated individuals, as provided by agency regulations.

An EBHRA’s status as an excepted benefit means only that it isn’t subject to health care reform’s Public Health Service Act mandates or HIPAA’s portability and nondiscrimination rules. However, like other HRAs, EBHRAs are subject to ERISA unless an exception applies (such as for church or governmental plans). Thus, reimbursement requests must be handled in accordance with ERISA’s claim and appeal procedures, EBHRA participants must receive a summary plan description, and other ERISA requirements will apply.

EBHRAs are also subject to HIPAA’s administrative simplification requirements (including the privacy and security rules) unless an exception applies (for example, for certain small self-insured, self-administered plans). In addition, EBHRAs must comply with the tax code nondiscrimination rules, which generally prohibit discrimination in favor of highly compensated individuals as to eligibility or benefits.

The Impact on Other Accounts

When deciding whether to offer an EBHRA, an employer should consider the impact on existing benefits, including health Flexible Spending Accounts, Health Savings Accounts, and existing HRAs (if any). Design decisions include:

• Which employees will be covered,
• How the EBHRA will coordinate with the employer’s other benefits,
• How much the employer will contribute, and
• Which expenses the EBHRA will reimburse.

An employer that has decided to implement an EBHRA must adopt appropriate documents before the beginning of the first plan year.

What Happens to Unused Amounts in Employee HRAs if Employment Terminates?

Question: Our company is thinking about adding an HRA that would be integrated with our major medical plan. Employees could carry over their HRA balances from year to year. What happens to balances if an employee’s employment terminates?

Answer: Your company must choose what will happen to HRA balances left at termination of employment. The HRA may be designed so that employees forfeit unused balances when employment ends (typically after a limited post-termination opportunity to submit reimbursements for pre-termination expenses). Or your company may permit employees to “spend down” their HRA balances and receive reimbursement for eligible expenses incurred after employment termination until the balance is depleted.

Alternatively, an HRA could be designed so that all but a nondiscriminatory class of employees forfeit unused amounts at termination. Regardless of which design you choose, terminated employees can’t be “cashed out” of HRAs (in other words, provided with cash or other benefits in an amount equal to some or all of the HRA balance). A cash-out feature would trigger taxation of all HRA distributions, whether or not they were used to pay qualified medical expenses. The design choices you make should be clearly stated in the HRA plan document and explained to employees in the summary plan description and other materials.

Whether or not the balance is forfeited, COBRA must be offered unless an exception applies. If COBRA coverage is purchased, the recipient will have access to the HRA balance (notwithstanding any forfeiture rule), increased by any account credits that would be received for the coverage period by a similarly situated non-COBRA beneficiary. Note: COBRA’s application to HRAs raises complex issues not discussed this answer.

If an employee dies while eligible to incur reimbursable expenses, the HRA may allow the employee’s balance to reimburse the substantiated qualified medical expenses of the employee’s surviving spouse, children under age 27 as of the end of the taxable year, or tax dependents for health coverage purposes. A deceased employee’s balance can’t be used to reimburse the medical expenses of anyone other than those individuals (there’s a limited exception for certain state government HRAs), or paid for any reason other than medical expense reimbursement.

This article appeared in Walz Group’s June 22, 2022 issue of The Bottom Line e-newsletter