HRA's and HSA's - Know the Differences

Copyright 2015- Not to be reproduced without express permission of Benefit Express Services, LLC

By Larry Grudzien Attorney at Law


What will be discussed?

For both HSAs and HRAs, the following important features will be discussed in this seminar:

• Which employees may participate? • What ERISA requirements apply? • What types of contributions are possible? • What amount of contributions are possible? • When are withdrawals are possible?


HRAs are:

• Provided in Rev. Ruling 2002-41 and IRS Notice 2002-45.

• Considered an employer sponsored self-funded health and welfare plan subject to Code §105(h) and ERISA.

• Financed by the employer’s (no pre-tax salary reduction contributions) contributions.

If requirements are met, participants may be allowed to carry over any unused balances.

What is an HRA?


HSAs are:

• They are available for tax years beginning in 2004. • Similar to Archer Medical Savings Accounts (MSAs) in

structure and benefits, but there are many important differences.

• Tax-exempt trust or custodial accounts created exclusively to pay for the qualified medical expenses of the account holder and his or her spouse and/or dependents.

Source: Code §223

What is an HSA?


• Funding flexibility-employer contributions, employee salary reduction contributions and tax-deductible contributions are all permissible.

• No use-it-or-lose-it rule-participants may accumulate funds and self-direct investment in a tax-exempt trust or custodial account.

• Ability to use funds for non-medical purposes without any effect on the tax-free character of amounts used for medical expenses.

• Account portability for employees changing jobs.

Why Consider an HSA?


• Any employer may offer HSAs. • Participant self-substantiation of expenses is required. • The tandem high-deductible plan that is required is

almost a mainstream-design. • Family members, employers and any other third party

may make contributions to an HSA on behalf of the eligible individual.

Why Consider an HSA?


• HRAs: Plan Document Enrollment form Summary Plan Description (SPD) Claim Reimbursement Form Summary Annual Report (if required to file Form 5500)

• HSAs: Trust or Custodial Agreement Enrollment Form Designation of Beneficiary Form Disclosure Statement

What documents are needed to establish them?


HRAs:

• The employer determines which employees will participate in the plan.

• An employer may exclude any employee as long as the plan passes the nondiscrimination tests of Code §105(h).

• Self-employed individuals, partners and more than 2% shareholders of a S Corporation may not participate.

Who is Eligible to Make or Receive Contributions?


HSAs:

• For any month, an eligible individual is defined as any individual who: is covered only by a high-deductible health plan (HDHP) as of the

first day of such month; is not also covered by any other health plan that is not a HDHP

(with certain exceptions for plans providing certain limited types of coverage);

is not enrolled in benefits under Medicare; and may not be claimed as a dependent on another person’s tax

return.

Who is Eligible to Make or Receive Contributions?


Who is Not Eligible to Make or Receive Contributions ?

HSAs:

• Any individual who is covered under: a spouse’s or dependent’s employer’s health plan that is not an

HDHP; or a Health FSA or HRA unless coverage under such Health FSA or

HRA is limited to “permitted coverage” or “permitted insurance” or other benefits.


HSAs:

• Yes. If individual is eligible for other “permitted coverage” or “permitted insurance” in addition to a high deductible health plan and still be eligible to make or receive a contribution to an HSA.

• What is permitted coverage or permitted insurance?

Can an Individual be Covered under “Other Coverage” Still Be Eligible?


HSAs:

• “Permitted Coverage” or “Permitted Insurance” is: Worker’s Compensation, Automobile Insurance, Insurance for a specified disease or illness, Insurance that pays a fixed amount per day of hospitalization, and Coverage for accident, disability, dental, vision and long-term

care.

What is Permitted Coverage or Insurance?


What is a High Deductible Health Plan (HDHP)?

HSAs:

• A health plan that in the case of individual coverage has an annual deductible is at least $1,300 for 2015 and in the case of family coverage has an annual deductible of $2,600 for 2015.

• Maximum out-of-pocket expense limit on covered expenses can not exceed $6,450 for 2015 in the case of individual coverage and $12,900 for 2015 in the case of family coverage.


What is a High Deductible Health Plan (HDHP)?

HSAs:

• Out-of-pocket expenses include deductibles, co-payments, and other amounts (other than premiums) that the individual must pay for covered benefits under the plan. If an employer provides a deductible of $6,450 for 2015 and 2011

for single coverage and $12,900 for 2015 for family coverage, the plan could not have any co-pay or co-insurance requirements once the deductible is met.


• HRAs:

Yes, HRAs are considered a self-funded welfare plan and must meet all of the ERISA requirements: • Trust requirement, if HRA is funded, • Claims procedures, • Reporting and Disclosure, and • Fiduciary requirements.

• HSAs:

No, if the employer makes participation in the HSA voluntary.

Must the ERISA requirements must be met?


Can an employee participate in a Health FSA in the same month?

HRAs:

• Yes, it is possible. • FSA and HRA cannot reimburse the same medical

expense. • If expense can be covered by both, plan must specify

that FSA must be exhausted first. • If plan does not specify, HRA must be exhausted first. • Employer may designate only certain expenses can be

reimbursed by HRA.


Can an employee participate in a Heath FSA or a HRA in the same month?

HSAs:

• No, unless one of the following exceptions is met: Expenses under FSA and/or HRA are limited to dental, vision

and/or preventive care benefits (“Limited Purpose Health FSA or HRA”);

If an employee suspends participation in a HRA for the year (Suspended HRA”);

FSA or HRA pays expenses above the deductible of the HDHP (“Post-Deductible Health FSA or HRA”); or

HRA pays or reimburses expenses incurred after retirement (“Retirement HRA”).


What Contributions are Permitted and How are They Treated for Tax Purposes?

HRAs:

• Reimburse participants for medical expenses up to a maximum dollar amount for any plan year.

• Reimburse participants for all eligible medical expenses or only those specified by the employer.

• Can be used with high-deductible group health plans or can be free standing.

• Any contributions are deductible by the employer and any reimbursements for expenses are not taxable to the employees.


What Contributions are Permitted and How are They Treated for Tax Purposes?

HSAs:

• Employee Contributions: Contributions are deductible (within limits) in determining adjusted gross income.

• Employer Contributions: These contributions (including salary reduction contributions made through a cafeteria plan) are excludable from gross income and wages for employment tax purposes to the extent the contribution would be deductible if made by the employee.

• Other Contributions: Contributions may be made by family members and other third parties. These contributions are deductible by the eligible individual to the extent the contributions would be deductible if made by the individual.


Can Salary Deferral Contributions be Made?

HSAs:

• Yes. They are treated as employer contributions and are excluded from the employee’s income.

• Code §125 has been amended to allow HSAs to be offered under cafeteria plans.

• These contributions are not subject to: the "use-or-lose-it rule," the "uniform coverage rule,” or the mandatory 12 month period of coverage requirement. Note, a health FSA may allow a participant who makes HSA

contributions to start or stop his or her election and to increase or decrease his or her election at least once a month.


Can Salary Deferral Contributions be Made?

HSAs:

• An HSA election may be made though a cafeteria plan on a “negative election” basis.

• Code §125 nondiscrimination requirements will apply to these HSA contributions.

• An employer may make matching contributions through a cafeteria plan - they are subject to the cafeteria plan nondiscrimination rules and not subject to the comparability rules. Contributions cannot be greater for highly paid employees.


What are the Limits for Contributions?

HSAs:

• The maximum aggregate annual contribution that can be made to an HSA is: the maximum contribution limit for the year (as adjusted

for inflation) • For individual coverage, the maximum amount is $3,350 for

2015 . • For family coverage, the maximum amount is $6,650 for

2015.



HSAs:

• The contribution limits assumes eligibility for a full 12 month period. • If eligibility is less than twelve months, limits are reduced by 1/12 for

each month unless covered by an HDHP on December 1 of any calendar year and remain covered for the testing period.

• Annual contribution limits for individuals who have attained age 55 by the end of the taxable year is by $1,000 in 2015 & thereafter.

• Contributions, including catch-up contributions, cannot be made once an individual is enrolled in Medicare.



HSAs:

• If an individual becomes eligible to contributions to an HSA at anytime other than January 1 of any year.

• A special rule allow allows participants to contribute up to the limits for the entire year if he or he is covered by an HDHP for the next calendar year.

• If a participant is not covered by an HDHP for all of 12 months of the next calendar year, the amount of the contributions attributable to months preceding the month in which the individual was not an eligible individual (which could have not have been made but for the provision) will be includible in the individual’s gross income.

• A 10-percent additional tax also applies to the amount includible.


What Happens if the Limits are Exceeded for any Year?

HSAs:

• Any contributions exceeding the limits are not deductible.

• Contributions made by an employer over the limits are included in the employee’s income.

• An eligible individual is responsible for withdrawing any excess.


HSAs:

• By the due date of the individual’s tax return (excluding extensions).

• Contributions may be made any time during calendar year.

When Must Contributions be Made for any Year?


Must Benefits be Funded?

• HRAs:

No. The DOL has not required employers to fund contributions that are promised.

They can be paid from the employer’s general assets.

• HSAs:

Yes, a trust be established with an authorized trustee or custodian.

An employee may invest in investments approved for IRAs (e.g., bank accounts, annuities, certificates of deposit, stocks, mutual funds, or bonds).

HSAs may not invest in life insurance contracts, or in collectibles.


Once Contributions are Made, Can they be Forfeited?

• HRAs:

Yes. The employer can determine under what situations an employee forfeits contributions.

They can include, not being used by the end of the year, by termination of employment or after a specified number of years.

• HSAs:

No. An employee’s HSA account balance is nonforfeitable at all times.


Are There Any Nondiscrimination Rules?

HSAs:

• Yes. If an employer makes contributions to employees’ HSAs, the employer must make available comparable contributions (e.g. same amount or the same percentage of deductible) on behalf of all employees with comparable coverage during the same period (e.g. single/family).

• The comparability rule may apply separately to part-time employees, full-time employee and former employees and HCEs and non-HCEs.

• These rules do apply separately for collectively bargaining employees.

• These rules do not apply for any employers contributions made through a cafeteria plan.



HRAs:

• Under Code §105(h), a plan is discriminatory for eligibility unless it benefits: 70% or more of all employees; 80% of employees eligible to benefit, as long as 70 percent or more employees

are eligible to benefit under the plan; or a nondiscriminatory classification of employees.

• An HRA is discriminatory for benefits if the type and amount of benefits available to highly compensated participants are not also available on the same basis to other participants.

• The comparison is based on benefits subject to reimbursement, rather than actual benefit payments or reimbursements under the plan, and on dollar amounts, rather than percentages of pay.


HSAs:

• What Happens If an Employer Does Not Comply With the Above Comparability Rule?

• The employer is subject to an excise tax equal to 35% of the aggregate amount contributed by the employer to HSAs of the employer for that period.



When Can Distributions Be Made?

HRAs:

• An employer decides when establishing the plan: What medical expenses or premiums may be reimbursed under

the plan. When reimbursements will be made. Whether any contributions will be made available for

reimbursements in future years. Under what circumstance employees will lose the right to receive

reimbursement. Over-the-counter drugs cannot be reimbursed without a

prescription from a doctor.



HSAs:

• Distributions for qualified medical expenses of the individual and his or her spouse or dependents generally are excludable from gross income .

• Amounts in an HSA can be used for qualified medical expenses even if the individual is not currently eligible for contributions to the HSA.

• Qualified medical expenses generally are defined as under Code §213(d) and include expenses for diagnosis, cure, mitigation, treatment, or prevention of disease, including prescription drugs, transportation primarily for and essential to such care, and qualified long term care expenses.

• Over-the-counter drugs cannot be reimbursed with a prescription from a doctor.



Example:

• Ann establishes an HSA in 2015 and is eligible to contribute $3,000.

• She has an medical expense in 2015 of $18,000 which is not reimbursed by her health plan or can a deduction on her Form 1040.

• She continues to contribute $3,000 each year during 2016, 2017, 20018, 2019 and 2020.

• In 2020, she withdraws $18,000 from her HSA tax free.



HSAs:

• General rule is health insurance premiums cannot be paid from HSA.

• Exceptions are for long-term care, COBRA, Medicare Part A and B, Medicare HMOs, and employer-sponsored retiree health insurance after age 65.

• Distributions from an HSA that are not for qualified medical expenses are includible in gross income.

• These taxable distributions are also subject to an additional 20% tax unless made after death, disability, or the individual attains the age of Medicare eligibility (i.e., age 65).



Example:

• Eric, age 35. establishes and contributes $3,000 to his HSA in March 2015.

• Later, he withdrawals $1,500 to buy a big screen TV. • When Eric later files his tax return for 2015, he must

report $1,500 as income and pay an excise tax of $150. • Would the answer be different if Erie had eligible medical

expense of $1,500 later in 2015?


Who Substantiates if Paid for Medical Expenses?

• HRAs:

The employee submits claims to the employer or to a TPA selected by the employer.

Procedures for submitting claims similar toe procedures under a Health FSAs.

• HSAs:

It is the eligible individual because he or she claims treatment on Form 1040.

The HSA trustee or custodian are not permitted to substantiate claims.

The employer is not permitted to substantiate.


What Happens to an Individual’s HSA Upon his or her Death?

• HRAs:

The employer may design a plan to allow a deceased employee’s spouse and other dependents to continue participation in the plan without electing COBRA.

If not, COBRA will be available.

• HSAs:

Any balance remaining in the decedent’s HSA is includible in his or her gross estate.

If the HSA holder’s surviving spouse is the named beneficiary of the HSA, then, after the death of the HSA holder, the HSA becomes the HSA of the surviving spouse and the amount of the HSA balance may be deducted in computing the decedent's taxable estate, pursuant to the estate tax marital deduction.


What Happens to an Individual’s HSA Upon his or her Death?

HSAs:

• If, upon death, an HSA passes to a named beneficiary other than the decedent’s surviving spouse, the HSA ceases to be an HSA as of the date of the decedent's death, and the beneficiary is required to include the fair market value of HSA assets as of the date of death in gross income for the taxable year that includes the date of death.

• A non-spouse beneficiary may reduce the taxable amount by payments made from the HSA for qualified medical expenses incurred by the decedent before death, but only if the payments are made within one year after the death.


May the employer place any Restrictions on the Withdrawals?

• HRAs:

Yes. An employer may place restrictions on what expenses will be reimbursed, the amount of the reimbursement and when the reimbursement will be made.

• HSAs:

No. Since employees own the HSA, an employer, trustee or custodian may not place limitation on withdrawals.

An HSA trustee or HSA custodian may place reasonable restrictions on both frequency and the minimum amount from an HAS.

A trustee or custodian may prohibit distributions for amounts of less than $50 or only allow a certain number of distributions per month.

An HSA trust or custodial agreement may not restrict the account holder’s ability to rollover or transfer an amount from that HSA.


Does COBRA Apply?

• HRAs:

HRAs are subject to COBRA requirements. Qualified beneficiaries will have access to unspent HRA balance

and will be entitled to additional HRA accruals that active employees receive.

Each qualified beneficiary will have an independent right under COBRA to continue coverage that was available immediately preceding the qualifying event.

• HSAs:

No. COBRA does not apply.


Does HIPAA Apply?

• HRAs:

Yes. HRAs are considered health plans for HIPAA purposes.

• HSAs:

No, if the HSA is not considered an ERISA plan.


What Reporting is Required?

• HRAs:

They are subject to the ERISA reporting requirements.

• HSAs:

The following requirements would apply: • Eligible individuals will report contributions to their HSAs, contributions

to their spouse’s HSAs, any employer contributions and distributions on Form 8889.

• Employer contributions are required to be reported in Box 12 on the Form W-2 of the employee, using code W.

• In addition, HSA trustees and custodians must report contributions to an HSA for a year on Form 5498-SA and distributions for the year on Form 1099-SA.


• HRAs:

No, unless the employer established another plan and institutes the transfer.

• HSAs:

Participants may transfer amounts into another HSA at anytime.

May amounts be transferred to another HRA or HSA?


• HRAs:

No.

• HSAs:

Participants have 60 days to roll back amounts received as distributions back into the HSA.

May amounts be rolled back?


Can amounts be contributed from IRA?

• HRAs:

No.

• HSAs:

Yes. You are allowed to make a one-time contribution to an HSA of an amount distributed from his or her IRA.

The contribution must be made in a direct trustee-to trustee transfer.

Amounts distributed from the IRA are not includible in the individual’s income to the extent that the distribution would otherwise be includible in income.

Such distributions are not subject to the 10-percent additional tax on early distributions.


When an individual participates in an HSA, he or she must:

• Determine whether he or she is eligible, • Determine the proper amount to contribute, • Remove any excess contributions, • Make distributions, and • Determine whether distributions are taxable or

nontaxable.

Individual’s New Responsibility under HSAs


• An employer has complete control in:

What medical expenses will be reimbursed, What unused amounts will be carried over, and For what period of time unused amounts will be carried over.

• An employer can decide from year to year what amounts they will contribute.

• HRAs can work with Health FSAs.

Why Would an Employer Participate in an HRA?


• ERISA requirements will still apply.

• Nondiscrimination requirements apply.

• Claim substantiation is still required.

• Possible funding issues.

• May reduce savings in going to higher deductible health plan.

• COBRA application is still uncertain.

Why Would an Employer Not consider Establishing an HRA?


• HDHPs have lower premiums.

• Employees will understand the true cost of health care by spending more of their own money.

• Employees can take an HSA with them when they leave.

• HSAs are less costly to administer because there is no claim substantiation required.

Why Would an Employer Participate in a HSA?


• Higher deductible plans are too radical of a design for some employers.

• Employees may not have funds to contribute to HSAs.

• Employees may spend HSA funds on non-medical expenses.

• Employer wants more control over administration of medical plans.

Why Would an Employer Not Participate in a HSA?


How does Health Reform Effect HSAs?

HSAs:

• Over-the-counter drugs may not be reimbursable without a prescription from a doctor.

• 10% penalty for nonmedical distributions is increased to 20%.


How does Health Reform Effect HRAs?

HRAs:

• Many of the health reform mandates will apply. • Which will apply and when will depend if the plan is

grandfathered. • Over-the-counter drugs may not be reimbursable

without a prescription from a doctor. • Free standing HRAs violate life-time and annual limit

requirements.


HRAs:

• To reimburse medical expenses, plans have to be integrated with a group health plans.

• What medical expenses can be reimbursed will depend on if group health plan is integrated with meets the minimum value requirements.

• Free standing HRAs are still possible for dental and vision benefits and reimbursement to retirees.

How does Health Reform Effect HRAs?

Questions?


Contact Information

• Larry Grudzien

• Phone: 708-717-9638

• Email: [email protected]

• Site: www.larrygrudzien.com

HRA's and HSA's - Know the Differences

Recruiting & HR

Transcript of HRA's and HSA's - Know the Differences