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Covered California Q&A

Covered California and Obamacare related questions from consumers, employers and agents are answered by Phil Daigle with the best information available at the time. Archived entries may no longer be accurate as the Covered California and Obamacare knowledge-base is evolving quickly. TO REQUEST A PERSONAL RESPONSE INCLUDE EMAIL ADDRESS.

How to Use a Health Reimbursement Arrangement (HRA)?

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Question: Can you discuss how an HRA (not HSA, but HRA) account affects the plans you can select and any financial assistance it may affect.

Answer: A health reimbursement arrangement (HRA) is an agreement between employer and employee to reimburse out-of-pocket medical expenses. The idea being that the employer can save money on insurance costs by purchasing a high-deductible (cheaper) health plan. Then compensate the employees for the loss in benefits by reimbursing their out-of-pocket expenses not covered by the group health plan or expenses subject to the deductible. HRA's are very flexible. They can be all-inclusive to cover any tax-deductible medical, dental, or vision expense or very limited - for example only covering the first $100 in expenses annually. As a IRS approved employee benefit plan, HRA's deliver tax benefits for both employer and employee, that is: the employer's payments are tax deductible and the employee reimbursements are pre-tax benefits.

The IRS requires that the HRA be combined with a fully-funded group health insurance policy. You cannot receive the tax benefits associated with an HRA if you create a stand-alone HRA - one designed to work with individual health insurance coverage. Only HRA plans that are attached to a conforming group plan can be used going forward.

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There is some confusion here. HRAs are funded with employee pre-tax contributions taken over the course of the work year. However, the annual contribution is fully funded at the beginning of the calendar year. As a way to fund the PPACA, HRA contributions were reduced from a maximum of $5000 annually to just $2500. (The effect being $2500 more taxable income for the employee, and more income and payroll taxes for Congress to play with.)

Employees often receive a VISA or MasterCard associated with the account and use it to pay for their qualified health care expenses — co-pays, coinsurance, certain over-the-counter supplies or durable medical equipment. Originally, HRAs were “Use It Or Lose It” plans — unused benefit dollars reverted to the employer, not to the employee as taxable wages. The IRS changed the rules when the PPACA took effect in 2014 to allow money to roll over into the next year — if the employer permits it — but not all employers have adopted that provision. The downside for an employer is that if an employee leaves in mid year, they still have access to 100% of the funds, and the employer has no recourse to obtain the money the employee never contributes.

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