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HRA Liability on Financial Statements


Guest sdelison
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Guest sdelison

Recently I have had several questions regarding HRA plans and the liability that they must account for on their Financial Statements. While I understand that the minimum would be nothing and the Maximum would be the total assets in the plan; I want to know if anyone can offer assistance on where I can get more detailed information. Could anyone direct me to a place I can find current industry standards or some benchmark information so I can offer this help to my company?

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Guest gdburns

I don't think that anything has been developed as yet, and I doubt that it will ever be. but then again, maybe I am missing what it is that you are concerned about, so I have to ask Liability for what?

As I see it, you first have to decide if there is a Liability and How did it arise and When will it be paid? In most plan designs that I have heard of, there is no Liability only an Expense, just like the Expense created by paying the employer portion of the health insurance.

The only thing new about an HRA is the ability to roll over unused funds. Absent that it is just a regular section 105 MERP. These have been around since before 1976.

If there is no rollover, the employer is usually funding on an as needed basis. If no claims then no funding. Is there a Liability or just an Expense when claims are paid?

If there is rollover, each month that portion of the contribution is given to the employee. Isn't that an Expense created at the time it is allocated to the employee?

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Guest sdelison

The person that has contacted me is the Controller of the Company.

He would like to have an estimated amount that they can account for at the end of 2005 but their plan year grace period extends beyond the end of the year. He would like to prepare for the Expense in the first few months of 2006 by booking some kind of liability on his 2005 Financial Statements.

I understand the Expense argument, because they do fund their plan on an as needed basis. I was just wondering if someone might know of an AICPA opinion or GAAP ruling. I understand that they could account for it as a contingent liability but he wanted an opinion on a bookable accrual.

Any more feelings on this--and thank you for your reply.

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I think the questions you pose are very valid.

The HRA, IMO, is very similar to what gdburns expressed. It is like a self funded single employer plan, in that there is little or no accountability to the participants.

How can one realistically set aside HRA funds, particularly funds that may be rolled over, if the expenses are paid on a current basis, only when actually claimed?

This seems to be bordering on a Medicare-like fiasco, in which a pay-as-you-go- system is used to account for future liabilities.

Don Levit

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Guest gdburns

I have a problem understanding what he is asking for, but there are some things that come to mind. What does the company Accountant/Chief Accounting Officer have to say?

He can easily calculate a monthly average using what he has already expensed, then multiply that average by the number of months that he desires.

He could do the above but add maybe 25%-40% to account for end of year useage which many times is higher than other months.

He could go back and look at the figures that were used to justify installing the HRa in the first place. Some calculations must have been done to determine if it was financially viable. Although I bet that no calculations were done, they just did it because some salesman told them it would be good and hyped it as the best thing since sliced bread.

He should also bear in mind the historical performance of their FSA during the final months of each year. Any surge there would suggest that the same sort of surge would take place with the HRA. This should substantiate using the 25%-40% that I mentioned before.

What puzzles me is that this is the same procedure that he would have used for many other items that are paid either after the invoice is received or for which he has an Accrual Account etc. All he has that is different is the name HRA.

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Guest sdelison

Talking about this specific company this is a new HRA that they have only had since June of 2005. They have very little history to look back to but I can give them your suggestion on the 40% more and comparing it to the spike in the FSA funding.

I only see two problems with the FSA to HRA comparison. First is that HRA that have a rollover might not have the spike in claims at the end of the year because they do not have the risk of loosing the funds. Second is the likelihood that employees will use the entire amount that they have withheld from their checks, but without a major medical event or a hospitalization they might not have any claims to submit to the HRA plan, if the plan does not offer Dental and Vision Coverage.

To comment on the concern from Don Leavitt I have two types of plans one that only offers coverage for Deductible and Co-Insurance expenses that they fund on an as needed basis. The HRA plans that I have that offer Dental and Vision coverage and have a spend down feature I require to be fully funded (meaning we hold the assets in Trust.) How are your clients doing it?

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Guest gdburns

I have no clients with HRAs. Most have an FSA and a few also have a "straight" MERP.

I expect to see the same end of year spike with HRAs. Remember that once the health insurance deductible is met the insurance company covers most if not 100% of medical expenses. If the employee waits until the following year, they will have to first meet the new year's calendar deductible before full coverage trips in. Most people would want to pass as much of the expenses to the insurance company before touching the HRA funds. It is not a matter of losing funds but getting someone else to pay as much as possible before using HRA funds.

I do not understand your statement that "employees will use the entire amount that they have withheld from their checks". Employees should not be making contributions to HRAs.

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Guest sdelison

I do not understand your statement that "employees will use the entire amount that they have withheld

from their checks". Employees should not be making contributions to HRAs.

I ment that in reference to comparing the FSA to the HRA. In the FSA employees do have it withheld from their checks and they consider it their money, but with the HRA's the employees must have the reimbursement requirements before they can receive the benefit so it might be harder for them to use the HRA amount.

Most of the HRA's that I have were put into effect with a HDHP so the deductible is the only reimburseable expense. I have Other HRA's that offer more comprehensive coverage but of the amount that I have about half are for the purpose of offering a HDHP to lower the heath insurance premium. They use the ER savings on the Premiums to set up the HRA amount, thereby allowing for a lower out of pocket expense for the Employees but still having the benefit of lower premiums for both the Employee and employeer.

On this accounting question that I have the plan does NOT have a rollver and they allow 60 days run out period to get the claims in from the prior year (to allow the the EOB to be processed and sent to the EE) What they are trying to do is estimate the cash outflow that they will have during the run out period so they do not overstate their assets on their 2005 financial reports (because of the liability in the HRA plan).

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My interpretation of the Controller's request is that he is asking for an estimate of the claims which the HRA will pay after the year end for services or supplies provided prior to the year end.

Presumably, the estimate will be labeled as an account payable in the company's balance sheet.

There are a number of actuarial techniques which can be used, including the one suggested by GBurns. It would seem as if the first year's estimate can be based upon any reasonable method.

The Controller must recognize the amount is an ESTIMATE of the payable. The actual amounts paid will equal the estimate only by coincidence.

Each financial period, a new estimate can be made which will be based upon the company's experience and any changes in the plan, composition of employees or laws.

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I have been using a formula (in California) that estimates the expected claim use of the HRA. It uses a formula that compares the risk for a specific group to the risk for a larger and more credible group, which is actually based on BCBS national numbers. It then does some adjustments for local costs, benefit changes and other things. However, what I have found is that if the group is somewhat normal age, sex, etc. demographic, it usually calculates the expected HRA cost at 60% of the maximum. We have been using this until we are able to develop a better estimation based on the groups' own experience.

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Guest sdelison
I have been using a formula (in California) that estimates the expected claim use of the HRA. It uses a formula that compares the risk for a specific group to the risk for a larger and more credible group, which is actually based on BCBS national numbers. It then does some adjustments for local costs, benefit changes and other things. However, what I have found is that if the group is somewhat normal age, sex, etc. demographic, it usually calculates the expected HRA cost at 60% of the maximum. We have been using this until we are able to develop a better estimation based on the groups' own experience.

Thanks! I have enjoyed the decussion and your help. This might be a good topic to continue and try to see if the AICPA or SEC will weigh in or has addressed in the past.

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Guest gdburns

sdelison

I keep feeling that I am missing something when you make such comments. What is it about this issue that makes you think that it warrants any comment from the AICPA or SEC?

What makes it different from unspent budgeted amounts? What makes it different from the payroll taxes dues on the last payroll? What makes it different from any of the numerous other items that need amounts to be reserved for the old period when going to a new period?

As I see it is a simple issue that every bookkeeper, accountant, controller etc faces in many forms each end of period.

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Guest sdelison

The difference between a simple accounting question and the HRA is the AICPA and GAAP rulings on accrued liabilities. You can only book a liability on your financial statements if it can be reasonably estimated and is expected. If you cannot estimate it you can only Footnote it in the financial statements from what I understand. I have an accounting background, but I am not a CPA.

An expense such as payroll and invoices are simple, most of the time you have the bill and have not paid it or you can use your last year’s bill with a reasonable adjustment to account for the liability.

This HRA plan is new this year, so they have no historical information to base an accrual on. The other issue is a reasonable amount. The posting made by leevena give a feeling for how they might be able to estimate the accrual, but with no historical background, and with no real concrete evidence that there will even be claims; it might be hurtful to the bottom line on the financial statements to require a company to book a large liability. It could also be hurtful to shareholders if you under estimate the liability and it affects the cash flow of the company in the next year.

I have received assistance from a friend (a CPA and PHD) and he searched a nationwide database and could find no opinion on what should be done. So it is just a guessing game at best. That is why I wanted more information from the SEC or AICPA because they are the governing body on accounting practice and dictate what can and cannot be done on Financial Statements, especially for a publicly traded company.

I wanted to see what other TPA and Companies have been doing on this matter so I could get a feel for industry standards before I called my client back and gave them my opinion. I appreciate all of the comments they have really opened my mind to the problem and I look foreword to further discussion on the matter.

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If you are looking for specific information concerning the development of claim reserves (yes, this is a claim reserve), then try the Society of Actuaries' or Casualty Actuaries Society' web sites and look for study notes on the development of claim reserves.

Further, the AICPA has some papers on the development of claim reserves for insurance company accounting.

All of them will lead you to the same comments you have been reading on this message. The first year's estimate is an educated guess, and subsequent years' estimates will be educated guesses based upon additional data.

I doubt very much if the "error" (the difference between your estimate and the actual payout) will be a material one for the purposes of your client's financial statement.

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Guest taylorjeff

I attended a meeting the other week in which a local TPA discussed HRAs. She specifically mentioned that if the employer allows employees to keep any unused funds at the end of the year and the funds roll over, that will require the employer to carry these funds as a liability on their financial statements. This makes sense as the rolled over funds represent a long term liability. Whether they book any of the short term liabilities, such as allowing a 90 day window for submitted claims, will probably depend on how strict they want to be in accruing these costs. I would expect, depending on plan design, the short term delayed HRA reimbursements will not amount to significant dollars.

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Why would rollover HRA funds be a carried as a long term liability? What guarantee or on what basis could it be determined when an employee might need all the funds or terminate employment?

The funds have to be immediately and fully available on demand, don't they?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest taylorjeff

These are from some slides of Dave Tuamola from Definity Health. As I read them, there is support, ie

within various accounting standards, for establishing a liability for future HRA payments. And, general acquiesence that different employers will either adhere to the "standards" or not, and that relatively small size of liability may not justify extensive accounting efforts.

It seems to me (I'm not an accountant) that standards exist, but there is room to accomodate differing levels of compliance depending on the complexity of the situation and the size of the future liability.

SOA 2004 Valuation Actuary Symposium - 34PD, Consumer-Driven Health Plans

Employer Valuation Issues - HRAs

> Employer accounting for unused Health Reimbursement Account

balances

• Notional account balances (unfunded)

• Balances generally forfeited at termination of employment

• Balances may be available during retirement

• Carry-over of unused amounts creates potential future liability for

employers

• Employer may or may not recognize liability for unused amounts

> Employer options/practice

• Treat like other self-funded benefit plans

– Contingent liability under FAS 5

– Expense paid claims plus IBNR

– No provision for unused balances

• Establish a liability for expected future HRA payments

– Some general support found in other accounting standards

(FAS 43, 106, 112)

– Unused HRA balances can be construed to “accrue” over

time

– May accrue liability for expected amount of future payments

• Employers currently using both approaches

– Depending on employer circumstances may not be material

to financial statements

– Many employers use 100% of HRA in establishing current

plan funding rates

> Estimating HRA IBNR

• IBNR estimation is similar to high deductible plan

• Incurred HRA claims exhibit inverse seasonal pattern

• Different completion pattern (due to limited account balances)

• Limited historical data available to determine lag patterns

– Differences by amount of HRA

– Differences in health status

> Estimating unspent HRA liabilities

• Could become a fairly complicated projection

– Include retirement and termination

– Assumed claim differences by age, length of service, and health

status

• Employers currently using simple estimates

– Definity long-term modeling suggests high percentage (90+%) will

ultimately be spent

– May get more specific when/if HRA balances grow larger

– Additional complexity may not be justified for employer groups given

the relative size of the liability

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Rollover HRAs are liabilities. Whether to be treated as current, short or long term depends on the plan design (forfeitures, caps etc) and other considerations such as employee turnover and expected claims.

My answers have no relationship to FASB.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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Guest sdelison

I agree with GBurns and Taylorjeff. The HRA liability must be accounted for. FAS 5, pulling from my memory, is the ruling that sets up the liability accrual rules. I talked with a professor that used to be a partner in one of the big 4 firms and he seemed to think that because there was no specific ruling on HRA liabilities they would be treated the same as any other liability. He simply stated that you use historical data to estimate the liability and in the absence of data you make the best guess that you can. Materiality most likely would not be a factor because the liability would be relatively small compared to the total amount on the statements.

Long term liabilities are those that you do not expect to expense in the next year so I guess you could argue that given time, and an unlimited rollover possibility; you could have a short term and a long term liability in your HRA, if it was not fully funded.

In my case the employer does not allow funds to roll because it is just a deductible reimbursement plan that they make a new deposit to each year. So it would always be a short term liability.

taylorjeff, thanks for the slides, they affirmed what my professor told me and were pretty much were the substance of our conversation and debate.

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taylorjeff,

Are those slides public? If so can you tell me how to get them.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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