HRAs and controlling health care costs – One year later
Commentary
By Timothy G. Pederson, for SBT
If those alarming, escalating health insurance costs are frustrating you, you’re not alone. Employers here in Wisconsin and across the country are struggling with double-digit increases. Recently the international consulting firm Hewitt Associates estimated that the rate of increase in health insurance over the next three or four years would be at least 15% per year. In Wisconsin, for many employers, it’s increasing more than that.
Hewitt also reported that while 61% of the USA’s population receive health insurance from their employers, their wages lagged health care cost increases by 10% to 12%.
On July 15, 2002, the tax treatment of Health Reimbursement Arrangements (HRAs) was clarified by the IRS and made Section 105 plans more desirable. An HRA can go along way in helping to better manage health insurance rate increases. It is a plan that incorporates patient-directed features, more choices for employers and employees when purchasing health care, as well as tax advantages.
Since July, 2002, our company has implemented a significant number of these plans for many Wisconsin employers. The main features of the IRS revenue ruling were that medical-type benefits reimbursed to employees through an HRA that meet certain requirements aren’t taxable to employees. Also, the HRA must be entirely funded by an employer and benefits can only be reimbursed for substantiated medical expenses. Carryovers into future years are allowed for unused reimbursements, at the discretion of the employer.
HRAs are an important answer to rising health insurance costs, which are in part caused by the over-utilization of health care by some employees covered by medical plans. That’s not the only driving force, but it is a significant one because it goes directly to the cost of health care packages. Important considerations are how medical benefits are used and if they are being used wisely.
The HRA is not a silver bullet–but it is a better way to take aim at the problem. HRAs are beneficial because employers can direct how the HRA health care dollars are spent. That is an incentive for employees to be more discerning consumers of health care, which can potentially help to control those rising insurance costs. The plans are also beneficial because of the numerous plan design options that are allowed as a result of last year’s ruling.
In Wisconsin, we’ve seen interest in HRAs grow significantly. If employers can see the potential for a cost savings of 10% or more over projected health care costs, about 80% of them would at least consider implementing an HRA.
As many people already know, Wisconsin has the dubious distinction of being a national leader in the costs of health care — by a significant amount. So HRAs become even more important for employers in our state.
Another thing to note: Soaring health insurance costs don’t just affect private sector employers. The public sector is also impacted, sometimes to a greater degree because public sector benefit packages, in some cases, are more generous than the private sector when you look at deductibles, co-pays and out-of-pocket expenses.
More clarifications have been provided this year concerning HRAs.
COBRA is one area that has been addressed as recently as March. HRAs are considered a form of group health insurance and are thus subject to COBRA continuation requirements. With last year’s IRS clarification, it was thought that the amount of the COBRA premium to be charged should be the contribution amount an employer would be providing monthly over the course of a year. But recently the Department of Labor indicated that the amount of premium charged to a terminated employee should be based on utilization of the plan. Because none of these plans were over one year old, it was suggested that the premium amount to be charged to the former employee should be 75% of what would be contributed for the year, divided by 12.
Also clarified recently is the fact that long-term care premiums can be reimbursed. Long-term care services, however cannot be, at this point. However, there are some legislative proposals being formulated to have that changed.
In addition, flexible spending account (FSA) forfeitures aren’t allowed to fund an HRA, so if there is any money left in an FSA, it can’t be rolled into the HRA by an employer.
Moreover, requirements for year-end reporting (Form 5500 mandated by ERISA) will apply to some HRAs. There’s no Schedule F required by the IRS for any plan at this point, but ERISA does apply for any employer with 100 or more HRA plan participants. Summary Annual Report requirements apply as well.
These are some of the things to consider when contemplating whether to adopt a Section 105 HRA plan for employees. The bottom line is this: HRAs finally provide employers with an opportunity to better manage rising health-are costs while preserving choices for employees. Consideration of an Section 105 HRA plan should be a part of the benefit planning process for all employers because of the numerous plan design features combined with potential cost savings and tax advantages.
Timothy G. Pederson is president of the Hartland-based Diversified Benefit Services Inc., a Section 125 & Section 105 third-party administration, plan design and communication firm. He can be reached at 800-234-1229 ext. 232. The DBS Web site is www.dbsbenefits.com.
