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History of Health Reimbursement Arrangements (HRAs)

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At the beginning of the 20th century, when most employees worked at large manufacturing plants, larger employers provided self-funded, self-managed, onsite medical care in the form of a company doctor. This developed into today’s system in which employers pay for employee medical expenses through self-insured or fully-insured health benefits plans. These came to be known as defined benefit healthcare plans in which employees receive a defined benefit, typically unlimited healthcare, at uncertain cost to the employer.  For more information on HRAs, see What is an HRA?.history of health reimbursement arrangements hras

HRAs Grew in Popularity as Deductibles Rose

In the 1960s-1990s, as deductibles and exclusions became more common in both self- and fully-insured health benefits plans, some employers instituted “arrangements” to reimburse employees for qualified medical expenses that were not covered by their health benefits plan. The federal government made these arrangements subject to ERISA (1974) and HIPAA (1996) to ensure that they provided equal benefits to similarly situated employees.

HRAs with Annual Maximums Became Popular in the late 1990s

In the late 1990s. health reimbursement arrangements with annual maximums, called “defined contribution plans,” became more popular—especially to reimburse employees for non-critical medical expenses (e.g. weight loss programs or prescription eyeglasses) which consumers had a higher propensity to incur than expenses for illness.

HRAs Formally Defined in 2002

On June 26, 2002 the IRS issued Notice 2002-45 and Revenue Ruling 2002-41 which clarified the definition of Health Reimbursement Arrangements (HRAs) and defined the criteria under which HRAs could be used. In general, this notice and ruling (and subsequent guidance) provides that:

(1)     HRAs must be funded solely by the employer

(2)     HRAs can only provide benefits for substantiated medical expenses

(3)     HRAs can allow the carryover of unused amounts to later years (i.e., the "use-it-or-lose-it” rules of Section 125 plans do not apply)

(4)     HRAs can reimburse employees for payment of personal health insurance premiums

(5)     HRAs may be used to reimburse former employees, including retirees, for qualified expenses

(6)     HRAs may create different benefits (both in size of allowances and type of medical expenses covered) for distinct classes of similarly situated employees. For example, HRA allowances for drivers could be different than those for managers, retail clerks, or call center workers.

To the U.S. Department of Treasury and IRS, HRAs are similar to arrangements employers have today to reimburse employees for incidental travel, meals, or office supply expenses. Employees pay such expenses themselves, submit receipts to their employer, and employers verify the receipts and reimburse employees tax-free.  Employers have virtually no reporting requirements.

To the U.S. Department of Labor, which has not yet formally commented on HRAs, HRAs are very different than reimbursing employees for non-medical expenses because the reimbursement of medical expenses and health insurance premiums are subject to HIPAA and ERISA employee privacy, disclosure and discrimination regulations.

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4 Real-Life HRA Case Studies

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If you've ever tried to learn a new concept, you probably appreciate that "knowing" is different from "understanding". When you have an opportunity to apply your knowledge, the lesson typically becomes much more real.  Case studies provide an excellent way of practicing and applying new concepts. As such, we've provided below four case studies from some of Zane Benefits' earliest clients. cartooncasestudy resized 600

A 40-Person Employer Converted from HSA to HRA Group Plan

In 2006 this New Jersey employer reduced its annual health insurance premium by almost $100,000 by raising the annual deductible on its fully-insured group health policy to $2,500—while giving each employee a $200/month HSA contribution to protect them against the higher deductible. HSA cash contributions cost this employer $96,000/year during the next 12 months.

In 2007 an employee complained about having to use his own “retirement money” (HSA funds) to pay for medical expenses. The employer switched from making HSA contributions of $2,400/year to giving HRA allowances of $200/month. The employees now received “100% coverage from their employer” and the employer saved $76,800/year because their $96,000/year in annual HRA allowances only cost the employer $19,200/year after 20% utilization.

A 203-Person Employer Converted Group Health Plan to HRA

The employer’s group plan imploded in 2007 after multiple years of cost increases. Participation was down to 50% of employees, with healthier families opting-out to seek less expensive coverage. The company found it difficult to recruit new employees with families due to the high cost of their group plan. The company switched to using an HRA as the complete replacement for their fully-insured group plan—giving generous allowances of $350/month to employees for health insurance premiums and medical expenses. The employer set up onsite “enrollment meetings” for carriers and agents to present personal policy options to employees, and gave double HRA allowances to employees with preexisting medical conditions that needed state-guaranteed coverage.

Today most of their employees have 100% coverage from a personal high deductible policy and their HRA, and the company finds it much easier to recruit workers. In addition to employees receiving 100% coverage, a typical family pays $200/month themselves to cover their dependents instead of the $900/month cost for dependents under the former group plan.

A 150-Person Seasonal Employer using HRAs for Retention and Re-Hiring

This country club had a group plan for their 38 full-time employees and employed 150 seasonal and part-time workers—such as lifeguards in the summer and personal trainers who also worked for other employers. After improving benefits and reducing costs for their full-time employees with an HRA, they explored what they could do for their seasonal and part-time employees.

Their solution? Give HRA allowances based on hours worked, and to suspend an employee’s HRA for 6-12 months once he or she had not worked for a 30-day period (This varied by class of employee). Now, personal trainers who haven’t worked for 30 days are notified that they can no longer submit claims and will lose their entire HRA balance if they don’t bring in a client in the next 150 days. Lifeguards are allowed to use their HRA for 90 days after the summer, and then get their suspended HRA balance reinstated when they return the following season.

A Franchise Owner Needed An Affordable Solution for Franchisees

This national restaurant chain, with 5,000 U.S. franchisees and 3,000 company stores, needed a standardized affordable solution for different labor markets in different regulatory environments. They developed two HRA-powered solutions: (1) A group plan guaranteed issue program and (2) A personal policy pure defined contribution program.

With the group plan HRA program, each store owner or manager obtained their own high deductible, guaranteed-issue, small group plan and used the company HRA to offer a standardized benefits program for the first $5,000/year of each employee’s medical expenses. The owner/manager received a group premium approximately 50% lower than a traditional group plan and offered different standardized benefits for each Class of Employee.

With the defined contribution HRA program, each employee received a fixed monthly or hourly (tied to payroll) HRA allowance. Employees were required to obtain health insurance to participate in the HRA and (mostly) younger employees obtained personal policies at 1/6 to 1/3 the cost of a traditional group plan.

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HRA vs HSA vs FSA vs PRA Comparison Chart

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pie chart cartoon1 resized 600Comparison charts provide an excellent way of summarizing complex information.  As a follow-up to yesterday's HRA case studies, check out this HRA, HSA, FSA, PRA comparison chart. It's a good summary of the key differences between the four primary types of health care reimbursement accounts and arrangements.

What does HRA, HSA, FSA, PRA Stand for?

HRA = Health Reimbursement Arrangement

HSA = Health Savings Account

FSA = Flexible Spending Account

PRA = Premium Reimbursement Arrangement 

 

HRA, HSA, FSA and PRA Feature Comparison

 

 

HRA

HSA

FSA

PRA

Who may Contribute Employer Only Employer or
Employee
Employee or Employer Employee (final rules pending)
Cost of Employer Contributions Only pay for Utilization (typically 25-50%) 100% Paid
regardless of Utilization
n/a n/a
Average Cost to Cover $2,000/year Deductible $500-1,000 $2,000 $2,000 $2,000
Maximum Annual Contribution No Maximum $3,250 (single)
$6,450 (family) for 2013
Determined by Employer; Capped at $2,500 starting in 2013 Determined by Employer; usually total compensation
Eligibility Requirements None or Determined by Employer Must have HSA-qualified health coverage ($1,250+ single / $2,500+ family) None or Determined by Employer None or Determined by Employer
Each Employee must open new Bank Account? No Yes No No
Tax Treatment Tax-free Tax-free Tax-free Tax-free
Medical Expenses Allowed Health Insurance Premiums + IRC 213(d) as Determined by Employer IRC 213(d) Expenses w/ No Employer Limitations IRC 213(d) Expenses;
but no Personal Health Insurance
Personal Health Insurance only
Use for Non-Medical Expenses None None None None
Carryover of
Unused Funds to Next Year
Determined by Employer Yes No No
Portable after Termination Determined by Employer Yes No No
Administrator Employer or TPA Employee Employer or TPA Employer or TPA
Cross-Compatibility With HSA* or FSA Limited-Purpose or Post-Deductible FSA or HRA With HRA or HSA* With HRA, HSA, or FSA

Employer Reporting

Employer Views Detailed Utilization Reports No Tracking Possible Employer Views Detailed Utilization Reports Employer Views Detailed Utilization Reports

*HSAs are fully compatible only with certain HRA & FSA administration platforms that enable HSA-Compatibility

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Why HRAs Will Become the Foundation of Employee Health Benefits

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New business methods and technology now allow employers to enroll employees in a single HRA software platform from which employees access their:

  1. HRA benefits;
  2. HSA link to any financial institution; and
  3. A Private Exchange for purchasing individual/family health insurance.future of employee health benefits

HRAs started out as supplements to employer health benefit plans for incidental items not covered by traditional health insurance plans. However, because of their enormous legal flexibility and new technology designed to take advantage of this flexibility, HRAs will become the foundation of every employer’s health benefit plan.

For employers who offer group insurance, HRAs will become the front-end delivery vehicle of primary health benefits for fully-insured and self-insured plans. For employers who cannot afford a group health plan, HRAs are becoming the basis of a defined contribution health plan that enables millions of employees to purchase individual/family health insurance policies directly from an insurance company.

Whether as the front-end of an employer-sponsored group plan or defined contribution health plan, here are just a few ways HRAs can deliver better and more cost-effective health benefits to employers and their employees today.

(1) HRAs Improve Retention 

The greatest challenge for employers today is retaining qualified employees. HRAs are extremely powerful for retention because employees accumulate for their future what they don’t spend today, but lose their accumulated balance when they quit (unless they meet employer-specified HRA retiree vesting requirements).  Additionally, employers can vary HRA benefits by class of employee to create further incentives for employees to stay and grow.

(2) HRAs Boost Recruiting Success

The second greatest challenge facing employers today is recruiting quality employees, whether for salaried and hourly positions. HRAs are the ultimate employee recruiting tool because they allow employers to afford and offer much better health benefits than their competition. In addition, using HRAs enables employers with group plans to offer better coverage to new employees by doing the following:

  • HRAs Eliminate Waiting Periods - New employees can enroll, submit claims, and have their claims approved for reimbursement, but not actually be reimbursed until the waiting period (e.g. six months) is complete.
  • HRAs Provide Coverage for Hourly, Part-time, or Seasonal Employees – Employees can receive HRA allowances tied to their hours worked but forfeit their entire HRA balance unless they work a minimum number of hours or return (after a seasonal layoff) within a specified time period.

(3) Allocate HRA Benefits by Class

Employers have always been allowed to allocate health benefits by using reasonable classifications with wages and retirement, giving different health benefits to employees based of job categories, geographical locations, etc.

But, before HRAs, employers lacked the technology and systems to offer health benefits packages tailored for each Class of Employee based on their recruiting and retention objectives. New HRA technology allows employers to set-up a completely different benefits plan for each Class of Employee (e.g. call center staff, managers, executives) and electronically administer such a different HRA benefits plan with electronic signatures and customized per-class plan documents and HRA SPDs (Summary Plan Descriptions).

(4) HRAs Improve Coverage for All Employees

Besides rising costs, every employee and employer has something they don’t like about their health benefits. HRAs allow employers virtually unlimited flexibility to add benefits (such as smoking cessation, weight loss programs, maternity supplements, or improved coverage for out-of-network providers).  Online tools connected to the claims processing system allow employers to monitor and control the cost of these additional benefits in real-time.

(5) Implement and capture savings from high deductible plans using HRAs

Using HRAs enables employees to move to high deductible plans.  Employers with fully-insured group plans can immediately save up to 50% on their existing group premium without reducing any benefits by switching to a higher annual deductible, and using their HRA to pay employee medical expenses under the new deductible. Employers who do this typically then give back about 1/3 to 1/2 of their savings to maintain the same level of benefits—for a net savings of 15%-30% after HRA reimbursements. Similarly, employers who use HRAs without a group plan can provide employees with funds to offset out of pocket expenses associated with lower-priced high deductible personal health policy.

These compelling benefits make HRAs a logical vehicle for employers of all sizes.

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History of Health Savings Accounts - MSAs to HSAs

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The History of Health Savings Accounts, or HSAs, goes back to the 1980s and 1990s when Congress began discussing Medical Savings Accounts (MSAs)

In the 1980s and 1990s, Congress began discussing Medical Savings Accounts (MSAs) where any consumer could (1) pay for all medical expenses with tax-deductible dollars and (2) spend or save unlimited tax-advantaged amounts for current or future medical expenses.History of Health Savings Accounts HSAs

In 1996, Congress created the Archer Medical Savings Accounts experiment, named after Representative Daniel Archer who sponsored the MSA amendment to HIPAA, allowing a limited number of MSAs for a trial period. MSA eligibility was severely restricted to up to 750,000 self-employed taxpayers and, despite their enormous tax advantages, they were complex, and only 150,000 MSAs were eventually opened before they were made obsolete by Health Savings Accounts (HSAs) in 2003.

Throughout 2003, with the existing MSA legislation set to expire on December 31, the federal government debated new legislation to expand the MSA experiment. The White House wanted universal Health Savings Accounts, similar to IRAs, that could be opened by any U.S. taxpayer and pay for any medical expense including health insurance premiums. Such an HSA could have become a universal employee, employer, and retiree health benefits vehicle.

However, Congress was greatly concerned about the budget implications of the White House request, particularly since the Congress was also debating the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) which was expected to alone cost $400 billion over 10 years (in 2005 the MMA cost was later revised to $1.2 trillion).

The end result was a watered-down version of Health Savings Accounts (HSAs), created via an amendment to the overhaul of Medicare in the MMA bill, and signed into law on December 8, 2003. Importantly, the bill placed five restrictions on HSAs, which combined to make HSAs fall short of their potential.

(1)     Only U.S. taxpayers already covered by highly restricted “HSA-qualified” health insurance plans could open Health Savings Accounts.

Additionally, other supplemental insurance coverage by a spouse or employer could automatically disqualify taxpayers from making HSA contributions.

This made most of the U.S. population ineligible for HSAs until, and if, their employer modified their health benefit plan.

(2)     HSA funds generally could not be used to pay for health insurance premiums

HSA funds could not be used to pay for health insurance premiums, except when the account owner was legally unemployed, on COBRA, over age 65, or using HSA funds to pay for long-term care premiums.

This kept HSAs as supplements to a health benefits plan rather than as substitutes for an employer-sponsored health benefits plan.

(3) Taxpayers received tax-deductions only for “contributions” to their HSA and then received no further tax incentive (or disincentive) to take distributions.

Economically, this made HSA funds the “money of last resort” for taxpayers to use for current medical expenses. Money in a HSA continues to appreciate and accumulates interest and/or dividends tax-free, and can be taken out at any time, tax-free, to reimburse a medical expense—even one that may have been incurred decades earlier.

(4)     Total annual contributions to an HSA, regardless of the source, were capped. (In 2013 this cap is $3,250 for an individual and $6,450 for a family.)

Additionally, if employers contribute to their employees’ HSA accounts, they had to do so equally without regard to each employee’s actual medical expenses.

This destroyed the primary economic reason for small to mid-size employers to switch to HSA-qualified health plans: Cost Savings. By raising the annual deductible on a fully-insured employer-sponsored group health policy (e.g. from $500 to $3,500), an employer typically lower their annual premium by 30-50%.  However, so that employees do not incur higher out-of-pocket costs, the employer would have to contribute $3,000 ($3,500 less $500) each year to each employee’s HSA regardless of whether they had any medical expenses.

(5)     Employers could not restrict (or, due to HIPAA, even know) what employees did with their HSA funds once the employer contribution was made.

This prevented employers from designing HSA-powered programs coordinated with the objectives (e.g. wellness, savings) of their primary group health plan coverage.  HSAs thus became a “black box” for employers once their contributions were completed.

Thus, HSAs could not be the universal health savings vehicle to help people afford health insurance, help pay for medical expenses, or enable employers to create more effective health benefit plans.  Instead, Congress converted HSAs into a healthcare retirement tool, much like 401(k)s or IRAs.

HSAs combine the benefits of both traditional and Roth 401(k)s and IRAs for medical expenses.

Taxpayers receive a 100% income tax deduction on annual contributions, they may withdraw HSA funds tax-free to reimburse themselves for qualified medical expenses, and they may defer taking such reimbursements indefinitely without penalties.

HSAs are unique—“IRAs on Steroids”—with triple tax advantages:

  1. Tax-deductible contributions,
  2. Tax-free accumulation of interest and dividends tax-free,; and
  3. Tax-free distributions for qualified medical expenses.

Every U.S. taxpayer should have an HSA to save money for retirement healthcare expenses—even maximizing their HSA contributions before contributing to other retirement vehicles.

HSAs are not the optimal health benefit solution for employers, who:

  1. Want employees to have proper economic incentives today to stay healthy and reduce their current medical spending,
  2. Seek to reduce the ever-increasing cost of their  group health benefits plan, or
  3. Are looking for an affordable replacement to a group health benefits plan altogether for either current or formerly ineligible employees.

The best way employers can achieve all three of these objectives is by using Health Reimbursement Arrangements (HRAs).

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History of Flexible Spending Accounts (FSAs)

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In the late 1960s, as inflation and other factors increased the cost of employer-sponsored health benefits, employers began instituting annual deductibles and coinsurance on their health benefits plans, and/or excluding coverage for certain medical items that were legally allowed to be covered by IRS regulations (e.g. vision, dental, alternative medicine). Excluding these medical expenses effectively almost doubled the employee cost for these items on an after-tax basis.history of flexible spending accounts fsas

Flexible Spending Accounts were Created in the 1970s

To respond to this dilemma, in the 1970s the IRS created Flexible Spending Accounts (FSAs) to allow employees to pay pre-tax dollars for medical expenses and dependent (child) care expenses not covered by their employer-sponsored health plan. With a Medical FSA, employees tell their employer they wish to forego receiving a certain amount of their taxable gross wages each year in return for an equivalent size non-taxable FSA annual allowance to pay for out-of-pocket qualified medical expenses.

If an employer pays for a $100 medical item for an employee it costs the employer $100. The employer would have to pay the employee up to $200 in gross pre-tax wages in order for the employee to have $100 left over after FICA/FUTA and federal, state and local income taxes (e.g. 50% combined tax bracket) to pay for the same $100 item himself. A $100 health benefit paid by an employer is worth up to $200 (100% more) in gross pre-tax wages to an employee. See Why Do Employers Offer Health Insurance.

There are three Types of Flexible Spending Accounts

There are three types of FSAs: Health, Dependent Care, and Adoption. The FSA allowance for a Health FSA must be an annual allowance given on the first day of the plan year, even though the employee will not have foregone the equivalent amount in salary reduction until the last day of the plan year. In contrast, with a Dependent Care FSA, employees can receive benefits only up to the then-current amount of pre-tax salary that has been withheld from their payroll (e.g. $200/month).

Health Flexible Spending Accounts

With a Health FSA, employees direct their employer to lower their pre-tax wages next year by $200/month, and the employee, on the first day of the next plan year, receives a $2,400 FSA allowance for medical expenses. The employee must be given access to the full $2,400 on the first day of the plan year. If an employee spends the full $2,400 in the first month and quits, the employer is not allowed to recover the unpaid balance.

Dependent Care Flexible Spending Accounts

Dependent Care FSAs are similar to a Health FSA that can only be used for dependent care expenses, except that employers may not allow employees access to any FSA funds that have not been already contributed through payroll deduction.

Depending on their individual income tax bracket, employees save a combined 18-50 percent federal, state, and local income and wage taxes on medical expenses funded through an FSA. Equally important, employees receive the intangible benefits of having funds for anticipated out-of-pocket medical expenses available through forced payroll savings.

Flexible Spending Accounts Reduce FICA

Employers also save money with FSAs by not paying wage taxes on FSA contributions. Each $100,000 of salary foregone by employees in favor of FSA contributions saves an employer $7,650 (7.65%) in FICA and FUTA taxes.

~24 Million Employers Offer Flexible Spending Accounts

Employers have generally embraced FSAs. According to a 2005 survey by Mercer Human Resource Consulting, in 2005:

(1) 80 percent of employers with 500 or more employees offered FSAs;

(2) 26 percent of employers with 10 or more employees offered a health care FSA, 35 percent of eligible employees were participating, and the average annual FSA employee contribution was $1,235/year; and

(3) 27 percent of employers with 10 or more employees offered a dependent care FSA, 14 percent of eligible employees were participating, and the average annual FSA employee contribution was $2,630/year.

There are approximately 24 million Health and Dependent Care FSAs.

Health Care Reform Limits Flexible Spending Accounts

The health care reform bill creates the following restrictions on the use of flexible spending accounts (FSAs):

  1. Beginning in 2011, non-prescribed over-the-counter drugs will no longer be qualified medical expenses
  2. Beginning in 2013, employee contributions to FSAs through salary reduction will be limited to $2,500 per year and adjusted in subsequent years based on inflation

Some Employees and Employers Dislike Flexible Spending Accounts

Despite their popularity, some employees and employers may dislike Flexible Spending Accounts for several reasons:

  1. Employees must specify in advance during the prior plan year how much money to take out of their pre-tax wages for their FSA (e.g. $100/month or $1,200/year). The employee loses 100% of any balance they do not spend in the subsequent plan year (or within the grace period following the plan year).
  2. Employers must make available to employees the full annual Health FSA amount (e.g. $1,200/year) on the first day of the plan year (e.g. January 1). This “Uniform Coverage Rule” means that an employee has access to the full annual FSA amount on January 1 even if an employee hasn’t yet funded any of their payroll contribution. If an employee quits on January 2 after submitting and being reimbursed for a $4,800 claim, the employee does not have to repay such “pre-funded” FSA reimbursements after termination. (The Uniform Coverage Rule applies only to Health FSAs and not to dependent care FSAs.)
  3. FSAs encourage frivolous end-of-year “use it or lose it” spending, and don’t reward consumers for wellness behavior by allowing them to save what they don’t spend today for their future medical expenses.
  4. Tax-sensitive employees desiring FSAs are often the same employees wanting Health Savings Accounts (HSAs). However, FSAs are not generally compatible with HSAs. Employees with an FSA cannot make contributions to a Health Savings Account (HSA) unless their FSA has an HSA-Compatible deductible (i.e. "post-deductible" FSA), or unless their FSA covers a limited number of items such as dental, vision, and preventative care allowed under HSA rules for compatible high deductible coverage (i.e. "limited purpose" FSA). Most existing FSA administration platforms cannot handle deductibles and/or differentiate between different categories of medical expenses to comply with HSA qualification rules.

There is a low likelihood of the IRS changing (1) and (4) above because a major tenet of FSAs (and Section 125 Cafeteria Plans) is that they cannot be used to defer the recognition of employee taxable income. Allowing employees to roll forward FSA balances would greatly increase their popularity, encourage tax abuse and have a significant revenue impact on the U.S. Treasury.

The IRS or Congress will also probably not change (2) above (“Uniform Coverage Rule”) because the IRS believes that in order to fall within the parameters of Code sections 106 and 105(b) (which allows FSA contributions to a health FSA and reimbursements from a health FSA to be tax-free), the FSA must operate like “insurance,” with both the employer and the employee bearing some risk.

Employer-Sponsored Health Insurance - Its Effect on Medical Expenses

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Originally, employers thought providing tax-free health benefits and paying all incidental medical expenses was a great way to compensate employees, with federal, state and city governments paying about half the bill through hidden tax subsidies. This subsidy was even larger for decision-making executives in high income tax brackets because the marginal federal personal income tax rate for people earning over $135,000/year ranged between 91% and 70% from 1959-1981. By the mid-1970s, employer-sponsored health benefits with virtually no deductibles were almost universal among major employers.HealthSpendingUSA6.25.11 resized 600

Experts say < 50% of all medical care in the US is supported by good evidence that it works

With third-party employers and government footing the consumer’s medical bill, the medical industry was given free rein to develop thousands of new treatments. Most of these were efficacious treatments, increasing the quality of healthcare across the country.

However, not all treatments were economical.  For example, the pharmaceutical industry developed solutions to problems that weren’t previously defined as medical issues (e.g. prescription drugs to allow people to eat unhealthy foods, Mirapex to treat restless leg syndrome sleep disorders, Viagra and Levitra to treat impotence caused by old age, etc.). By classifying these solutions as “prescription drugs” rather than over-the-counter medicines, the industry was able to sell them to patients with other U.S. citizens and/or employers paying a large portion of the cost through the tax subsidy on employer-sponsored health insurance plans.

“The sad truth today is that less than half of all medical care in the United States is supported by good evidence that it works, according to estimates cited by the Congressional Budget Office.” -New York Times Editorial

LASIK provides an interesting Case Study

Of course, most of the thousands of medical solutions developed, such as MRIs, vaccinations, and surgical procedures, work well and greatly improve our medical care. But, because these solutions were also paid for through distant third-party employers, there was little incentive for medical providers to make these solutions more affordable. LASIK eye surgery, which is typically paid for by consumers themselves versus employers, came out in 1997 and competition forced the price from $3,500/eye to $500/eye for a greatly improved product. Meanwhile, the cost of MRIs and other technology-based innovations increased threefold over the same time period where the consumer did not have to pay their own bill.

Healthcare cost rose from $27 billion in 1960 to more than $2.3 trillion in 2007

As a result of these and other problems, U.S. healthcare costs, funded mostly through tax-free employer-sponsored health benefits, rose from $27 billion in 1960 (5% of GDP) to more than $2.3 trillion in 2007 (16% of GDP). Today the cost of employer-sponsored health benefits exceeds profits for many large companies and threatens the viability of major employers. For example, the market value of General Motors dropped 50 percent after the company announced a $60 billion retiree healthcare obligation (They've since switched to an HRA for many employees that reimburses retirees for medicare supplement premiums).

Due to rising costs, some employers and employees have been economically forced to abandon employer-sponsored health benefits entirely.  Today, less than 50% of U.S. small businesses offer group health insurance.

Is Consumerism the Solution?

Many U.S. economists today agree that part of the solution to rising medical costs is returning the consumer to paying directly for part of their healthcare. To a degree, most employers have already embraced this concept by having employees pay the first few hundred or thousand dollars of their own medical care—typically by raising their annual deductible, increasing coinsurance, and shifting premium costs to employees for spouses and dependents.

Raising the employee’s annual deductible has proved difficult for employers to implement because:

  1. Employees expect to receive virtually 100% coverage for medical expenses as part of the benefits of a “good job;”
     
  2. Employees have not been financially educated to budget for medical expenses, and get angry at their employer (or carrier) when they incur non-covered medical expenses; and
     
  3. Employees typically have to pay up to twice as much “after tax” for medical expenses and health insurance premiums not paid through a qualified employer-sponsored health plan, health savings account or cafeteria plan.

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The Growth of Individual Health Insurance - 2000s to Today

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Prior to World War II, many employees purchased their own individual or family health insurance policies, sometime called “personal” health insurance policies, just like they do today with homeowners, auto, and life insurance. As mentioned earlier, in 1945, to get around wartime wage and price controls, employers were allowed to give employees unlimited health benefits without having to report it as income.

Individual Health Insurance Growth

This created an up to 2-for-1 tax advantage (depending on the income tax bracket of the employee) for employer health benefits provided by employers versus individual health insurance policies, purchased by employees themselves.

Today, most employers offer their employees group health benefits and typically pay 50%-100% of the cost for employees who participate. If the employer’s plan allows, employees are also permitted to contribute pre-tax funds (through salary reduction) to add their dependents to the employer group plan.

Employer healthcare costs (and group insurance premiums) have been increasing the past ten years at 3-4 times the rate of general inflation. In response to the rising costs of group coverage, employers have been reducing health benefits, increasing the employee (and especially dependent) cost to participate, or even cutting out health benefits entirely.

Employees who work for companies that do not have a group health policy, or for companies that do not offer participation in a group health policy at rates they can afford, purchase their own individual health insurance policy directly from an insurance carrier such as WellPoint, UnitedHealth Group, Aetna, Coventry, Humana, Assurant, or other insurance carriers.

A major cost increase for employees the past few years has been the cost of adding a spouse or dependent to their employer’s group plan. Employers have drastically reduced the amount they contribute to spouses and dependents in response to rising group plan expenses.

Individual health insurance today in 45 states costs 1/2 the price of employer group coverage for the 70%-90% of applicants who medically qualify

Individual health insurance, which used to cost much more than employer-sponsored group insurance, now costs healthy new applicants 1/2 the price of comparable employer-sponsored group policies in 45 states.  And, if health care reform stands, in 2014, most individuals and families will receive a massive subsidy from the federal government to buy individual health insurance through an exchange.

The dramatic relative price change between individual versus group policies has occurred because 45 U.S. states allow insurance carriers to distribute individual health insurance with medical underwriting. Allowing medical underwriting means that insurance carriers may reject, accept, or uprate (i.e. charge more for) applicants based on their health status or age. KY, WA, and NH changed in 2003 to allow medical underwriting.

In contrast, in New York and other “guaranteed-issue” and “community-rated” states, insurance carriers must accept all applicants for individual health insurance and cannot charge more based on health status or age.

In a typical non-geriatric population group, 20% of the people incur 80% of the healthcare costs, and 80% of the people incur 20% of the healthcare costs. Individual health insurance carriers only accept the healthy 70%-90% of applicants at typically 50% of the premium cost of group policies. Once accepted, states require that the carrier cannot increase premiums based on the insured’s subsequent health, but can raise individual health insurance premiums based on the cost of all insured individuals in a large geographic pool—typically a pool of very healthy individuals with individual health policies. 

Individual Health Insurance is Guaranteed Renewable

Once a person obtains an individual health policy, they can renew it until age 65 regardless of employment and their premium cannot be increased solely due to their own very large claim (e.g. $1 million). Premiums do increase each year with general medical inflation but cannot be increased due to individual claims history.

The number of people buying individual health policies is growing rapidly. In a 2007 report, Citigroup estimated the existing market for individual health insurance policies had grown to 19 million members and further projected it would grow 37% to 26 million members by 2010.

This estimate may be conservative given recent regulatory changes by the federal government affecting individual health insurance. Some of these regulatory changes include:

(1) Employers can now use HRAs to reimburse Individual Health Insurance 100% tax-free

The IRS now allows employers to use HRAs, or Health Reimbursement Arrangements, to reimburse employees, tax-free, for premiums paid for individual health insurance. This effectively reduces the cost to employers of providing employee health benefits by up to 50%. For employers who cannot afford to offer any type of group plan, or meet participation in their existing group plan, this also opens the door to reimburse the cost of individual health insurance premiums.

(2) HIPAA Now Requires States to offer Guaranteed-Issue Individual Health Plans to Uninsurable Individuals

Since 2006, the Federal Government requires all states to offer guaranteed-issue “state risk pool” individual and family coverage to employees and dependents with preexisting medical conditions that lose their employer-sponsored health benefits. Forty states go beyond the federal mandate and offer such state-guaranteed coverage to any resident who is charged more or rejected for individual health insurance. However, state-guaranteed coverage is expensive: the federal government suggests states charge 300% the cost of similar coverage for healthy people.

(3) Health Reform Requires a Federal Risk Pool offer Guaranteed-Issue Individual Health Plans to Individuals who have been Uninsured for 6 months

In July, 2010, the health reform bill created the Pre-Existing Condition Exclusion Plan (PCIP) to provide health insurance coverage to uninsurable citizens. More than 20 states (including District of Columbia) administer their own PCIP program. The federal government and HHS run the program on behalf of the remaining states.

Summary of Individual Health Insurance Today

Individual Health Insurance is the fastest growing sector of the health insurance industry, expected to increase from 19 million to 35 million policies from 2007 to 2012.

Individual Health Insurance has become an affordable alternative to group employer coverage for healthy families in 45 states. It is portable and permanent regardless of employment.

Individual Health Insurance can now be payed with tax-free dollars in the following ways:

  1. Employers can pay premiums as a tax-free benefit through HRAs; and
  2. Employees can pay premiums on a pre-tax basis through Premium Reimbursement Arrangements (PRAs, also called “Premium Only Plans”).

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Why Businesses Should Never Pay Individual Health Insurance Premiums

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Federal regulations prohibit businesses from paying directly for employee's individual health insurance premiums, outside of an HRA (Health Reimbursement Arrangement), or other IRS/HIPAA/ERISA-qualified tax-free vehicle (e.g. Section 125).
Employer Payment of Individual Health Insurance

Some businesses might want to pay directly for an employee's individual health insurance plans without utilizing an ERISA and HIPAA-compliant HRA, but doing so may put the business out of compliance with federal regulations and increase the business's (and employee's) tax liability.

There are two major reasons an employer should never pay for its employees' individual health insurance plans directly:

  1. Paying for Individual Health Insurance without an qualified HRA Causes the Employer to "Endorse" the Individual Health Insurance Plans
  2. Paying for Individual Health Insurance without an HRA Causes the Payments to Become Taxable Income to the Employees

When an employer pays directly for an individual health insurance plan, they effectively endorse each employee's individual insurance plan as part of an employer-sponsored group health benefit offering. In other words, according to federal law, the employer is treating the individual plan as part of an employee welfare benefit plan regulated by ERISA. Because most individual health insurance plans do not meet minimum ERISA group plan requirements, the employer is out of compliance.

Separately, an employer is not allowed to know the details of employees HIPAA-protected medical expenses. Because most individual health insurance costs are based on an employee's health, the health insurance details must be HIPAA protected. When an employer pays for the individual policy, they can violate HIPAA-privacy requirements because they know the details of a HIPAA-protected employee expense.

The federal government has guidelines for employers who want to contribute to employee's individual health insurance premiums without violating the HIPAA and ERISA regulations. An ERISA and HIPAA-compliant HRA will ensure compliance with federal law.

Furthermore, if an employer were able to technically comply with HIPAA and ERISA in paying for individual health insurance premiums, such payments would be taxable income to employees unless they were reimbursed through an HRA or other IRS-qualified tax-free vehicle. Using an HRA an employer can give employees effectively up to twice as much in health benefits through tax savings than if the employee were to pay for such expenses themselves.The IRS requires that legal plan documents be established in order for employees to deduct the individual health insurance premiums from taxable income on the annual W-2.

An IRS-compliant HRA will ensure the tax deductibility of employee's individual health insurance premiums.

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How List-Billing Works with HRAs

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Many Health Reimbursement Arrangement (HRA) providers do not allow the use of List-Bill arrangements with HRAs because list-billing creates potential HIPAA/ERISA violations for the employer (See See Why Business Should Never Pay for Individual Health Insurance for more information).

Some insurance companies allow companies to set up List-Billing for their employees. List-Billing is a process that allows an employer to facilitate employees' purchase of individual health insurance policies via post-tax payroll deduction.

list bill

Under a list-bill arrangement, a health insurance carrier sends an employer a single bill for each employee's personal health insurance policy.

The employees (not the employer) pay their premium in full, usually through payroll withholding (post-tax), and the employer transmits the payment to the insurance company on behalf of the employee.

Essentially, the employer serves as a facilitator for the premium payments, but under federal law is not permitted to contribute to the premium. Under List-Billing, because the employer does not contribute to the premium, and the individual owns the insurance policy, group policy requirements do not apply. The individual is covered by the terms of their individual policy.

With a Health Reimbursement Arrangement (HRA) (when List-Billing is not involved), employees:

  1. Purchase their own individual health insurance policy;

  2. Make payment to the carrier (via ACH transfer, check or credit card) for their individual health insurance premium;

  3. Submit a health insurance premium claim to the HRA with proof of payment (e.g. bank statement, credit card statement or carrier receipt); and

  4. Receive tax-free reimbursement from their employer via check, payroll addition, or direct deposit.

In a List-Billing scenario, the only difference is #2 (above), the employee's method of premium payment. The employee must still submit claims for reimbursement of their insurance premium to the HRA.

Rather than paying the carrier directly via ACH transfer, check or credit card, the employee pays the carrier indirectly (through their employer) via payroll withholding (post-tax). Nothing changes as far as the HRA is concerned.

With an HRA (when List-Billing is involved), employees:  

  1. Purchase their own individual health insurance policy;

  2. Make payment to the carrier through their employer (via post-tax payroll withholding) for their individual insurance premium;

  3. Submit a health insurance premium claim to the HRA with proof of payment (e.g. payroll stub showing withholding or carrier receipt); and

  4. Receive tax-free reimbursement from their employer via check, payroll addition, or direct deposit.

     

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3 Reasons Employers Should Use HRA Admin Software

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Many employers that self-administer an HRA often overlook important compliance obligations that put them at financial risk. Failure to comply with the minimum HRA administration requirements is common and can be costly.  And, if an employer does take the extra steps to fully comply, the administrative cost will likely outweigh the HRA Benefits.

Here are the top three reasons employers should consider using HRA Software to self-adminster an HRA:

  1. Tax Savings/IRS Compliance
  2. Federal Compliance
  3. Ease-of-Use

1. HRA Admin Software Creates Tax Savings 

If an employer pays for employee's individual health insurance premiums without utilizing HRA admin software, such payments might need to be reported as taxable income to the employees.hra admin software

Employees receive dollars 100% tax-free

The IRS requires that HRA plan documents be established in order for employees to deduct the individual health insurance premiums from taxable income on their annual W-2.

HRA Admin Software (and their tax benefits) increase the ability of employers to recruit and retain good employees.

Employers deduct reimbursements as non-taxable business expense

An IRS-compliant defined contribution health plan will ensure the tax deductibility of employee's individual health insurance premiums.

2. Federal Compliance

The federal government has guidelines for employers who want to contribute to employee's IRS-qualified medical expenses. An IRS/ERISA/HIPAA-compliant defined contribution health plan will ensure compliance with federal law. 

HIPAA Compliance

Using HRA software, employees submit claims for health insurance premiums and other medical expenses online, via fax, or mail. Once submitted, claims are processed and employers click a button periodically to reimburse employees via check, payroll addition, or direct deposit; all reimbursements go directly from the employer to the employee at the time and method chosen by the employer. All claims are kept HIPAA-protected and all receipts are stored digitally in compliance with HIPAA for 10 years as required by the IRS for company and personal audit purposes.

ERISA Compliance

Some companies might want to pay directly for an employee's individual health insurance plan without utilizing an ERISA and HIPAA-compliant defined contribution health plan, but doing so will put the employer out of compliance with federal regulations and increase the employer's (and employee's) tax liability.

There are two major reasons an employer should never pay for its employee's individual health insurance plan:

When an employer pays directly for an individual health insurance plan, they effectively endorse each employee's individual insurance plan as part of an employer-sponsored group health benefit offering. In other words, according to federal law, the employer is treating the individual plan as part of an employee welfare benefit plan regulated by ERISA. Because most individual health insurance plans do not meet minimum ERISA group plan requirements, the employer is out of compliance.

Separately, an employer is not allowed to know the details of employees HIPAA-protected medical expenses. Because most individual health insurance costs are based on an employee's health, the health insurance details must be HIPAA protected. When an employer pays for the individual policy, they can violate HIPAA-privacy requirements because they know the details of a HIPAA-protected employee expense.

3. Ease of Use

HRA Administration software allows an employer to administer the benefits program in less than 5-minutes per month! The process is completely online and paperless.

Pre-taxing occurs via payroll

HRA administration software does not require a Third Party Administrator (TPA) to touch the employer's money. All reimbursements go directly from the employer to the employee at the time and method chosen by the employer (typically via payroll).

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4 Controversial Ways to Improve Health Insurance

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What else can be done to improve U.S. health insurance? Major pieces of legislation have already been passed to allow (1) tax-deductible employer-reimbursed individual health insurance and (2) high-deductible health insurance with Health Savings Accounts. Additionally, some experts believe the Affordable Care Act (ACA) makes the most changes to the health insurance industry since World War 2. Here are 4 controversial ways to further ensure better health insurance for every American at less cost. controversial health insurance reform

1. Allow Health Insurance to Be Sold Across State Lines

The largest determinant of the monthly premium for individual health insurance is not the individual’s age or health but the state in which they live. Because of a federal law passed in 1945, it is currently illegal for a carrier to sell health insurance to an out-of-state individual—unless the out-of-state insurer goes through an expensive filing process and meets the unique health insurance requirements of the individual’s state of residence. If this law were repealed, anyone could purchase a health insurance policy from any carrier in any state.

In Michigan in 1908, when Henry Ford produced the Model T costing $825, there were thousands of small auto manufacturers in the United States making cars costing $10,000 or more. To protect their own manufacturers, neighboring states passed laws claiming that the Model T was dangerous and thus not allowed to drive on their roads. Eventually, the federal government stepped in and regulated the automobile industry—mandating that any automobile meeting certain minimum standards could be freely driven in every state. 

Allowing consumers to purchase health insurance from carriers in any state might not only increase competition and drive down prices; the increase in competition might also allow millions more individuals with preexisting conditions to get private health insurance without having to rely on more expensive state-guaranteed coverage.

2. Make All Health Insurance Premiums Tax Deductible

Make all health insurance premiums tax deductible for individuals without regard to employment (individual health insurance is already tax deductible via a Section 105 Plan or Section 125 Plan). This extremely simple change would take away the main reason employers are involved in health insurance and level the playing field for all Americans, whether they are employed, self-employed, or unemployed. Overnight, this bill could reduce the after-tax price of individual health insurance for consumers 25 to 50 percent.  

Making all health insurance premiums tax deductible for all consumers may be long overdue—this simple change in our tax code could correct an inequity and eventually return responsibility for health insurance to individuals and government instead of employers.

3. Make All Healthcare Providers Disclose Prices

Almost all healthcare providers, from major hospitals to individual doctor’s offices, charge varying prices for the exact same service depending on the network in which the patient is a participant. The same doctor visit might cost a cash-paying un-insured person $110, while a person with an employer-sponsored health plan bargained down the price would pay only $42. 

While there is nothing wrong with large customers bargaining for better prices, today there is no longer any true “retail” price in medical care. Providers have inflated their retail prices two to five times just to meet contracts forcing them to give 50 to 80 percent discounts to large purchasers. 

In 1934 the Securities Exchange Act created the SEC and mandated that U.S. public companies disclose accurate financial information. This act did not tell businesspeople how to run their business—it merely told them that they must disclose pertinent facts to investors or be subject to criminal prosecution. 

Healthcare providers could be required to disclose their prices and all discounts given off these prices. Open disclosure might drive consumerism and lower prices for all. Does a consumer paying a $10,000 hospital bill have a right to know that another person is being charged only $1,000 for the exact same service? Do people standing in line at a pharmacy have a right to know when they are being charged two to three times the price of the person next to them for the exact same drug?

Armed with medical care retail price information, consumers could seek out the best networks and might be able to negotiate with medical providers.

4. End Federal Lifetime Health Benefits for Congressmen, Senators, and Government Officials

When it comes to health insurance, we have created an elite class. This elite class consists of our elected federal and state officials who have voted themselves and their associates unlimited lifetime health benefits paid for by taxpayers. In doing so, they have removed themselves from being participants in solving the current health insurance crisis that affects the rest of American citizens. They do not directly feel the pain of America’s health insurance problems.

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Section 105 Plans

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A Section 105 plan allows businesses to reimburse an employee for medical and insurance expenses incurred by the employee or his or her dependents. The most common type ofsection 105 plan Section 105 plan is a self-funded (or self-insured) health plan, where the employer has chosen to self-fund (or self-insure) health benefits rather than pay premiums to an insurance company. Section 105 plans are also frequently found in the form of Health Reimbursement Arrangements (HRAs).  A businesses might also implement a Section 105 plan alongside a conventional employer-sponsored health insurance plan (to reimburse amounts not covered by insurance) or as a stand-alone medical reimbursement plan (to reimburse amounts for out-of-pocket health insurance premiums). 

What are Advantages of Section 105 plans?

Section 105 plans offer several advantages to both the employer and the employees. All reimbursements are 100% tax deductible by the businesses and its employees.  When designing a Section 105 plan, the business has enormous flexibility, such as establishing maximums amounts for reimbursement and setting eligibility requirements for participation. The biggest advantage to employees is that a Section 105 plan reimbursement is not considered taxable income.

Can a Business Self-Administer a Section 105 Plan?

The short answer is yes, but most experts do not recommend self-administering a Section 105 plan with out proper IRS/HIPAA/ERISA admin software.  Many employers that self-administer a Section 105 plan often overlook important compliance obligations that put them at financial risk. Failure to comply with the following requirements is common and can be costly:

  1. COBRA - A Section 105 plan is subject to COBRA rules.
  2. HIPAA Privacy - A Section 105 plan is governed by HIPAA Privacy rules.
  3. Medicare Reporting - A Section 105 plan is subject to Medicare Secondary Payer (MSP) provisions.
  4. Legal Plan Documents - ERISA requires that Section 105 plans be established and maintained pursuant to a written instrument.

What are the Section 105 Nondiscrimination Rules?

The Section 105 nondiscrimination rules require that the plan must not discriminate in favor of highly compensated individuals (HCIs) with respect to eligibility to participate in the plan or benefits provided under the plan.

How Does a Section 105 Plan Work?

Section 105 plans are actually quite simple in practice:

  1. The business must establish a formal written Section 105 plan (See plan document requirements).
  2. The business determines the amounts available to each employee for reimbursements during a period of coverage (generally a year). 
  3. As eligible expenses are submitted, the business reimburses the employees (100% tax-free) up to the available amounts. 
  4. Unused funds at the end of the year are typically carried over to the next year. 
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Wellness HRAs - A New Way to Reward Healthy Employees

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Many businesses might think that getting their employees involved in wellness is not part of their business. Wrong. The health of their employees affects their profit in three ways: (1) Healthy employees are often the most productive employees. (2) Unhealthy and employees who smoke are often the least productive. (3) The cost of health benefits for health insurance (i.e. sickness care) now exceeds profits for most large businesses. Moreover, busy employees typically look to their employer for their health benefits, and they expect any treatments to keep them healthy to be offered and paid for by their employer.

There is an emerging “wellness industry” offering products and services to keep employees healthy, to slow the effects of aging, and to prevent diseases from developing in the first place. These include programs for weight loss and smoking cessation.

Wellness HRAs—Programs to Improve Health and Productivity

The federal government now allows employers to provide tax-free wellness care (e.g., weight loss and smoking cessation programs) to their employees through HRAs, or Health Reimbursement Arrangements. In addition to saving the company money in the long run on sickness expenses, employees who successfully take advantage of wellness programs will likely be more loyal and will thank their employer for the rest of their lives, as will their coworkers and family members.

Moreover, new rules allow a wellness HRA to offer unlimited first-dollar coverage for wellness and preventive care including:

  • Periodic health evaluations (e.g., annual physicals)
  • Screening services (e.g., mammograms)
  • Routine prenatal and well-child care
  • Child and adult immunizations
  • Tobacco cessation programs
  • Obesity weight loss programs
  • Preventive care

Every employer encouraging employees to choose high-deductible and/or HSA-qualified health plans could have a wellness HRA offering first-dollar coverage for wellness items ranging from annual physicals to obesity treatment programs—doing so will encourage the employees to stay healthy, keep them from skipping important screening items like mammograms, and save their employer and them thousands on future major medical expenses.

Funding HRAs Based on Completion of Wellness Activities

Some firms are taking "Wellness HRAs" to the next level and only funding the HRA if the employee completes specified wellness activities.  For example, they might give employees $100 in an HRA if they compete a heath risk assessment.  The most common wellness activities include:

  • Health Risk Assessments
  • Biometric Screening
  • BMI Reduction
  • Annual Physical
  • Completion of Smoking Cessation Program

Here's an old screen shot of our wellness HRA dashboard to give you an idea of how this might work.

wellness hra

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What is a MERP?

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MERP stands for Medical Expense Reimbursement Plan and is any plan or arrangement under which a business reimburses an employee for out-of-pocket medical expenses incurred by employees or their dependents.  If administered correctly, all reimbursements are paid to the employee 100% tax-free. A MERP is not a Section 125 Plan, Cafeteria Plan, or Flexible Spending Account.  Rather, it is a Section 105 Plan.merp

How Does a MERP Work?

A MERP is essentially a business expense account for healthcare - employees need to turn in receipts to get reimbursed. These receipts are required to be stored for up to 7 years for IRS auditing purposes. The IRS will not allow tax deductions via a MERP if the expenses were not qualified medical expenses.

A business must set up a MERP (it cannot be set up by an individual). During plan set up, the business decides what types of medical expenses to reimburse.

A MERP is extremely flexible and can reimburse nearly every medical expense an employee may have.  

What Medical Expenses Can a MERP Reimburse?

A MERP can reimburse any expense considered to be a qualified medical expense by the IRS, including premiums for individual health insurance policies. Note that businesses may restrict the list of reimbursable expenses in any way they choose.

Some common categories of reimbursable items include:

1. Health Insurance Premiums
2. Doctor Visits
3. Dental
4. Vision
5. Pharmacy
6. Hospital
7. Over the Counter Drugs (Prescription required)

For more information, see IRS Publication 502.

Do You Need Health Insurance to Participate in a MERP?

While many businesses use a MERP to reimburse employees for the cost of their individual health insurance coverage, an employee is not required to have health insurance in order to participate in a MERP.  MERPs can also be used in conjunction with health savings accounts (HSAs) and flexible spending accounts (FSAs)

Why Would a Business Offer a MERP? 

There are two reasons a business would offer a MERP:

  1. A MERP Can Reimburse Employees' Out-of-Pocket Health Insurance Premiums

  2. A MERP Allows Employers to Self-Insure Group Health Plan Deductibles 

A MERP is a form of self-insurance. An employer can use a MERP as a way to lower medical insurance costs but still cover the employees’ qualified medical expenses tax-free. In a year when the cumulative medical costs for employees are relatively low, the savings on insurance costs can be quite significant.

For example, if a business reduces medical insurance coverage in order to lower premiums without adding a MERP, that employer is simply shifting medical expenses from employer to employee. In addition, the employee could then be forced to pay their higher medical expense using after-tax funds. The MERP helps avoid that added cost to the employee. 

A MERP helps defray the cost of medical expenses. It also helps the employer save money on taxes. Like a health savings account, funds in a MERP can roll over from year to year. The employer decides the amount that rolls over. Unlike a health savings account, only employers can contribute funds to MERPs. The funds cannot come out of an employee's salary, voluntarily or involuntarily. There is no limit on the amount of funds an employer can put into a MERP.

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Using HRAs to Offer Health Insurance to 1099 Contractors

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1099 health insuranceA common question we receive at Zane Benefits is: "Can I Offer a Health Reimbursement Arrangement (HRA) to 1099 Contractors?"

Technically, the answer is no. But, many businesses use our HRA Software to offer health benefits to 1099 contractors.  The primary difference is that, unlike W-2 employees, 1099 contractors must report all HRA reimbursements as income on their personal tax return.

Due to its flexibility, hra software can be the ideal health benefits solution for 1099 contractors because:

  1. The 1099 contractors can only use the money on health insurance and medical expenses;
  2. Unused amounts remain with the company when the 1099 contractor is no longer working with the company;
  3. The plans help companies recruit and retain the most talented 1099 contractors.
  4. Many 1099 contractors can already deduct 100% of the cost of their individual health insurance on their personal tax return.
  5. The business is not required to pay payroll taxes on the reimbursements.
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4 Health Insurance Reform Alternatives for Supreme Court

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The Supreme Court is set to rule on the consitutionality on the health reform bill, or Affordable Care Act (ACA), in the next few days (June 21-25). So, in yesterday's webinar, The History and Future of Small Business Health Insurance, Professor Paul Zane Pilzer outlined 4 possible outcomes for the Supreme Court Ruling. Which option do you think is most likely? Tell us in the comment section.4 option for health insurance reform

1) Uphold Entire ACA

For this to happen, 1 of 5 Republican Justices (for example, Roberts or Kennedy) would have to side with President Obama and the Democratic party. If this were to happen, the entire presidential election will be centered around Romney vs Obama on the topic of repealing health reform.

2) Invalidate Part of ACA

Under this scenario, the Supreme Court would remove the individual health insurance mandate. Both sides agree that they must then invalidate Guaranteed Issue since only unhealthy would purchase insurance. 

3) Reject Entire ACA

Under this theory, congress wouldn’t have passed the bill without all its major provisions (e.g. Guaranteed Issue + Mandate + Federal Subsidies + Exchanges).  In other words, without the Mandate, the bill never would have been passed.

4) Postpone Ruling Until 2015

The logic here is that the individual mandate must have taken effect (post-2014) to have a valid claim before the U.S. Supreme Court. If so, the bill might stand until 2015 or might postpone implementation.

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2 Minute Guide to Health Reform HRA Research Fees

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Recently, the IRS issued proposed regulations on the comparative effectiveness research fees required by the Affordable Care Act (ACA).  hra research feesWhile the ACA may be struck down any day by the Supreme Court, if it stands, HRA Plans may be subject to the proposed research fee rules. Read on for a quick guide on how the research fees will currently be applied to health reimbursement arrangements (HRAs).

Background on the HRA Research Fee

The Affordable Care Act includes a "research fee" HRA plan sponsors must pay on an annual basis. The fee is technically referred to as the Comparative Effectiveness Research (CER) fee.  According to the bill, this fee will be used to fund governmental research -- ACA created the "Patient-Centered Outcomes Research Institute" to evaluate the relative effectiveness of various medical treatments and procedures.

The ACA imposes this fee on insured plans and self-insured health plans. The IRS has determined an HRA falls under the "self-insured health plans" definition, since HRAs are technically Section 105 ERISA health plans funded by employers. At present, the fee is scheduled to become effective for plan years ending on or after October 1, 2012. 

How the HRA Research Fee Works

According to the proposed rules, the types of HRA plans that must pay the fees are HRAs that are not integrated with another applicable self-funded medical plan with the same plan year.

The research fees go into effect for plan years ending on or after October 1, 2012 and before October 1, 2019. The fee will be adjusted each year, as follows:

  • Plan years ending October 1, 2012 – September 30, 2013: $1 multiplied by the average number of lives
  • Plan years ending October 1, 2013 – September 30, 2014: $2 multiplied by the average number of lives
  • Plan years ending October 1, 2014 and beyond: to be determined based on increases in the projected per capita amount of National Health Expenditures

For HRAs that must comply, there is a special rule that you would only count one covered life for each employee.  Thus, a family of four covered by an HRA would result in only a $1.00 fee ($1.00 x the employee-participant only).

HRA plans will only be required to report and pay fees annually via Form 720, due by July 31 each year.

A good HRA Administrator will provide the plan sponsors with reporting to assist with participant counts.

It is important to note these are "proposed" regulations only, which means the IRS will be taking public comments before they become final. Written or electronic comments must be received by July 16, 2012. 

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What Motivates Businesses to Provide Employee Health Benefits?

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The following post is adapted from a Linked-In Answer that I responded to last month via the Linked-in Answers Tool.  It received "Best Answer", so I thought I'd share it on the employee health benefits blog. The question was what motivates you to provide employee benefits?Motivation Employee Health Benefits

 

Why Businesses provide Employee Health Benefits

Two words: Recruiting & Retention.

The primary reason companies offer employee health benefits today is for recruiting and retention purposes. That is, employee health benefits are a valuable form of compensation because:

  1. They are tax deductible to the business
  2. Employees get the benefits 100% tax-free

As a result of this enormous tax advantage, $1 in employee health benefits may be worth $1.50 - $2.00 in pay to an employee depending on his or her family's tax bracket.

Additionally, the $1 in employee health benefits costs the company less than $1 in pay. (Remember, it's tax deductible to the business so the company does not have to pay payroll taxes!)

The history of businesses providing employee health benefits goes back for decades.

In the early 1940s, the federal government changed the tax laws to allow businesses to provide employee health benefits as part of an employee's compensation package 100% tax-free.

During World War II, workers demanded wage increases that were prohibited by wartime wage and price controls. To grant a concession to labor without violating wage and price controls, Congress exempted employer-sponsored health insurance from wage controls and income taxation—in effect allowing off-the-books raises for employees in the form of non-taxable health benefits.

This created an enormous tax advantage for employer-sponsored employee health benefits over health insurance purchased by employees with after-tax dollars (e.g., auto insurance).

By the mid-1960s employer-sponsored health benefits were almost universal.

In the 2000s, the IRS extended the tax deductions of traditional group-based employee health benefits to individual health insurance via employer-based Premium Reimbursement Arrangements (Section 125 Plans) and Health Reimbursement Arrangements (Section 105 Plans).

 

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Health Reform (ACA) is Upheld by Supreme Court

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Today, the Supreme Court issued an opinion related to health care reformA divided Supreme Court upheld the constitutionality of the Obama administration's health-care law. The court said Congress was acting within its powers under the Constitution when it required most Americans to carry health insurance or pay a tax. Chief Justice Roberts' vote saved the ACA.

The Affordable Care Act, including its individual mandate that virtually all Americans buy health insurance, is constitutional. There were not five votes to uphold it on the ground that Congress could use its power to regulate commerce between the states to require everyone to buy health insurance. However, five Justices agreed that the penalty that someone must pay if he refuses to buy insurance is a kind of tax that Congress can impose using its taxing power. That is all that matters. Because the mandate survives, the Court did not need to decide what other parts of the statute were constitutional, except for a provision that required states to comply with new eligibility requirements for Medicaid or risk losing their funding. On that question, the Court held that the provision is constitutional as long as states would only lose new funds if they didn't comply with the new requirements, rather than all of their funding.

The bottom line is that the entire ACA is upheld, with the exception that the federal government's power to terminate states' Medicaid funds is limited.

Please see below for a detailed overview of each opinion.

health reform supreme court ruling

  1. The individual mandate survives as a tax. The only effect of not complying with the mandate is that you pay the tax. The Court holds that the mandate violates the Commerce Clause, but that doesn't matter b/c there are five votes for the mandate to be constitutional under the taxing power. The Court holds that the Anti-Injunction Act doesn't apply because the label "tax" is not controlling.
     
  2. The Medicaid provision is limited, but not invalidated.  A majority of the Court holds that the Medicaid expansion is constitutional but that it will be unconstitutional for the federal government to withhold Medicaid funds for non-compliance with the expansion provisions. Another way to think about Medicaid is that the Constitution requires that states have a choice about whether to participate in the expansion of eligibility; if they decide not to, they can continue to receive funds for the rest of the program.

Click here to read the official opinion.


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