IRS Approves Self-Directed Medical Plan.
The IRS has approved an important self-directed medical benefit plan that both employers and employees should know about.
One IRS-approved self-directed, employer funded, medical benefit plan is called a Health Reimbursement Arrangement or HRA. The distinguishing features of an HRA are:
1) It is entirely employer funded;
2) It can pay for particular, specific, health benefits selected by the employer; and
3) A carryover rule that allows employer contributions, not used currently by the employee for whom they are contributed, to be carried forward in an accumulation account and used in some future year.
The employer contribution amount is established before the first day of a tax year, must be made on a non-discriminatory basis, and is not subject to an arbitrary limitation. The employer determines how much to contribute.
With an HRA, your employees can have more choice and greater control in health care decisions. You can use an HRA to reduce projected double-digit increases in health care costs by encouraging your employees to be careful shoppers. Traditional flexible spending arrangements are maintained with employee salary reduction contributions, and have a "use it or lose it" rule. HRAs are used only to reimburse qualified medical care expenses of employees, former employees, retirees, or dependents of any of those, and are funded entirely by employer contributions -- not with salary reductions or similar elective arrangements.
A qualifying HRA can reimburse up to the maximum available in an employee's account in the plan for any period, and unused amounts carry over to later periods to increase the maximum amount available then. Unused amounts accumulated over several years could be available to pay post retirement medical expenses.
According to IRS guidance, employers have great flexibility in plan design. HRA plans can be used to supplement other plans in a coordinated offering of health care benefits.
For example, an HRA cannot be funded through salary reduction arrangements, but benefits can be coordinated with cafeteria plans to maximize tax-free and pre-tax benefits from a combination of employer and employee contributions. Because the plans are not subject to an annual maximum contribution limit, it will be possible to fund fairly high levels of HRA benefits.
HRAs can even be coordinated with Health Savings Accounts (HSAs) to provide preventive care at no cost to the employee.
We have studied the IRS guidance on this new way of providing flexible medical benefits and can help you evaluate how an HRA may fit into your benefit package.
Call to arrange an appointment for a detailed explanation of this new form of benefit plan.
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