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HRA Balance Rollovers


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I'm not sure where I think i saw this disccussed already, but does anyone know if the balance left in an HRA

plan (which rolls over to the new year) is "bookable"? i.e., does the employer have to pay taxes on this money? or is there "dispensation" under the new laws?

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I do not understand your issue or terminology.

If the money is "rollable" that would mean that it already has been allocated to the employee and already taken as an expense by the employer. So what would be taxable and in what asset account of the employer would you be holding such money that should already be the property of the employee?

Unless there is some sort of forfeiture provision that could cause reversion to the employer. If there is the issue should ahve been addressed in the planning stages, otherwise How could a rational decision have been made as to what plan design and features to use?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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I'm not sure I understand my terminology either! Part of the problem is that I'm not an accountant, and don't know what terminology to use.

As I understand an HRA, it's basically a 105/106 self insured or self funded health plan. If an employer commits, or rather promises 100,000 max in a plan year, and at the end of the plan year, only 50,000 was used by the employees, then the excess 50,000 rolls over, or stays in the plan for the next plan year. Assume the employer commits, again, to another 100,000 for the new plan year, but only has to come up with 50,000 in new money.

I guess my question is, are there any special rules for HRAs that allow excesses to be handled any differently than they would be for the usual 105/106 plan?

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There are a variety of ways that an HRA could be structured.

The first step for the employer is to decide what amount will be given to each employee, such as $1200 for single and $2400 for those with dependents. A rollover provision is up to the employer. I have some groups with a rollover and some without. If the group has a rollover, the employer decides if they want a maximum amount rolled over or not. In most situations, the employer will want to max out the rollover amount, usually to the maximum out of pocket limits of the underlying plan.

Another consideration is what to do with HRA dollars promised to an employee who now leaves. An employer could structure their plan with a retirement feature, and let the dollars go with the employee when they retire. For all other ex-employees, the HRA dollars need to revert back to the employer/plan. Any payment made to an ex-employee that approximates the HRA amount is subject to IRS taxation. (I am not fully clear on all of the aspects of this)

Since the HRA is funded with employer dollars only, there are a variety of ways the employer can fund the accounts. They can fund it on a monthly basis, meaning that the employer makes available 1/12th of the $1200 dollars. So in month 1 the employee has $100, month 2 $200, and so on. The other way is for the employer to make the entire promised amount available from day one.

The employer can also determine if they want to actually place the HRA funds into someone's account, or if they want a "pay as you go" policy. Most of my clients use "pay as go"...why tie up funds for the future?

As for a taxing event, you may be a little confused. If for example, the entire promised amount of HRA dollars was $50,000 and the employer ends up paying out $28,000, then the $28,000 is the "expense" the employer books. The difference ($22,000) was never paid out, so it is a savings. Any HRA dollars the employee uses are not taxed either.

Good luck, and hope this helps.

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Now you really have me confused.

An HRA is a self insured section 105 Medical Expense Reimbursement Plan with the ability to rollover any unused funds. It is used for medical expenses (such as co-pays, deduxctibles and other out-of-pocket expenses) that are not covered under the major medical plan. It is very unusual for an HRA to have such large amounts. An HRA is very often an alternative to an FSA. Notice that leevena used $1200 and $2400 and referred to "usually to the maximum out of pocket limits of the underlying plan.

The major medical plan can be either fully insured (e.g BCBS) or self insured (self funded). This is what usually has a large annual or lifetime limit.

The relevance of 106 is so that the employee does not get the employer contribution included in their gross income. 105 is mainly so that the benefits do not get included.

The fact that you have such limits suggests to me that what you are referring to is not an HRA but something else. The amount of $100,000 per year seems more like the spending limit in a Benefits Credit arrangement, where the employer is allocating up to $100,000 to cover premium for the plan selected or in this case for the claims incurred for major medical. While it is very possible for it to also state that any amount not used to pay providers will be available to reimburse plan participants for out-of-pocket expenses (as in a 105 MERP) I have never seen such a plan design. Since the disbursements to service providers should be kept separate for auditing and other purposes, from the reimbursements to employees, I doubt that the 2 items are linked in this manner.

The "major medical" portion also has different rules than the "expense reimbursement" portion, which makes it more important that the 2 items be separated.

I suggest that you recheck your info. See if it is a finite amount or if it is an "up to" amount. Also check to see how and when the money is made available. This should all be in the SPD.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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GBurns...I assumed that when JMOR99 used the larger amounts in his question ($50,000 and $100,000) he was referring to the aggregate amount of promised dollars in the HRA portion. For example, if the employer promsied $1,000 per person and there were 100 employees taking single coverage, the total maximum risk for the employer would be $100,000.

I hope that is what JMOR99 was asking.

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Leevena: Your assumption correct. So I'm guessing from what I've seen so far, an HRA rollover balance is

not going to have any special tax treatment outside of what is already normal for a 105/106 plan.

Here's what I think the intention of this question is: the employer has got to precommit, or budget for, an

anticipated "expense" of 100,000. I suspect he wants to somehow "hide" or avoid taxation, or not count as assets, any dollars that rollover.

The more I think about it, the more I'm convinced that I should have posted this in a corporate tax forum.

This is more of an accounting question.

But I certainly appreciate your taking the time to answer. Thanks, Burns and Leveena!

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If the dollars that rollover go with the employee at termination, they are already expensed and there is no way to hide them since they are not there as his asset.

If the rollovers can be forfeited, then they should be a contingent liability and still be on his books and again there is no way to hide them since they are still there.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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I don't think you need to worry about "hiding" the dollars. Let me go through an example and see if it helps.

Let's assume that you have calculated that your maximum HRA funding amount for all your employees is $100,000. The probability of spending that entire amount is low, so let's further assume that you expect your actual payment to be $60,000.

You know have two options, one is to actually place dollars into each participants accounts, or the second is to release the dollars from your business as the claims come due. All of my groups have chosen to pay funds as they are presented for payment. So if I end up paying out $60,000 in the plan year, that becomes my HRA Expense.

If you use the "pay as you go" approach, you still need to carry forward the balances. However, since you did not fund the employee account, it is just a promise. At this point I always recommend to my clients that they speak with their accountants as to how to do this. You are right, this is more of a financial decision as oppposed to a benefit decision.

Hope this helps.

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Leevena:

As I understand the FASB regulations, they do not deal directly with HRAs; rather, the concern is geared more toward retiree health benefits.

I guess the rationale is that health benefits are not vested.

The employer can terminate the plan as well.

So, there was less concern for funding of current health benefits, than there was for future (retiree) benefits.

In this case, of an HRA rollover, however, the employer's current liability appears to be lower, but in reality, it is not, because no actual set aside monies (in your situation) were accumulated.

I am not an accountant, but I do wonder how the numbers would be reflected between the rollover amount and the balance of the employer liability?

Don Levit

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An HRA balance that is vested is no different than any other unpaid Payables item. It is just another unpaid liability.

An HRA balance that is not vested is just another budget item. If it gets used, it is expensed, if it does not get used, it vanishes like any other budgeted item that does not get used during the budget period.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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