HRA vs 105 Medical Reimbursement

[Guest Wislndixie]

Could someone in laymens terms, define the difference between an HRA and a Section 105 medical reimbursement plan? I have an employer that wants to move from a $500 80/20 medical plan to a $2500 100% medical plan. Which vehicle would be the best to use. Also, he already has a 125 plan with FSA reimbursement, could he not just make employer contributions to fund the difference and utilize the 125 plan? He intends to keep the employees portion at $500 and 80/20 to $1,000 out of pocket. Thanks so much.

Wisln

[Bob R]

I'll give it a shot.

First, both are considered self-funded health plans under 105(h). But, the primary differences are that the

HRA is permitted to have a rollover feature of unused amounts and is not subjet to maximum amount being available at all times (but the employer would probably want that in your situation). Also, while not a big deal in this situation, the HRA can only be funded w/employer contribution; HSA can be both employer and employee contributions.

What it boils down to - does the employer want some aspect of consumer driven health care? In other words, do you want to reward those who spend their health care $s wisely? If so, you use the HRA and permit rollovers of unused amounts. If you don't care, then use either the FSA or possibly even consider just a plain self-funded health plan that is neither an FSA nor an HRA. I don't mean to confuse you - but the employer could just underwrite the increase in the deductible with a plain self-funded health plan. There would be no rollover feature and employees won't view it (hopefully) as money that must be spent or it is lost. The employer is just acting like an insurance company - it is covering expenses that are above a certain amount (the deductible) up to the level where the insured coverage kicks in.

[Guest nherkowitz]

The short answer that I generally give is that an HRA is a section 105 plan with some additional features, most notably the ability to roll over unused amounts from year to year. In general, if you don't need the rollover, you don't generally need the HRA.

[namealreadyinuse]

What is a "Section 105 medical reimbursement plan?" It sounds to me like a full-blown self-insured medical plan, not just a health FSA. If that is the case, it is subject to ERISA. An HRA is just a tax devise that is not subject to ERISA, right?

[leevena]

The differences between a Section 105 (MERP) and HRA are many, but for most people the answer is fairly short and simple. nherkowitz answers is somewhat correctly and that is where the nuances get drawn into.

Section 105's originated in the early 50's and were used primarily in the ag business, mostly small farmers. As time progressed we started to use them as a partially self-funded health plan, where an employer purchased a large ded health plan and then superimposed a plan of benefits under that deductible. Those benefits were paid from an employer account. For example, the employer purchases a $5000 deductible, 100% thereafter, but tells the employees that there is a $500 deductble, 80/20 untile $5000. The employer funds the difference. There is also a market for highly compensated employees using the merp as a way to indemnify themselves for all out of pockets.

Now comes along the new consumer driven plans. An HRA uses Section 105, along with othe codes. The IRS had to clarify a couple of issues, such as roll-over, cash-outs, and how to interact with FSA's. So if you were to do a detailed comparison of the two plans, there would be many things to compare. However, for the average layman and employer, what nherkowitz said is fairly close and I would use that.

Where I disagree with nherkowitz, with all due respect, is the strategy between the two. The HRA is intended as a long-term strategy, whereas the 105 can be short-term. Unless very cash strapped, I would always recommend a carry-over provision for the client. This will provide the group with flexibility for the future. As the HRA funds accumulate, the employer has the ability to purchase less insured benefits and replace that corridor of risk with self-funded (HRA funds).

Hope this helps.

[Guest nherkowitz]

Section 105 applies whenever a company self-funds all or a portion of the health expenses. If your client wants a fully insured $1,000 deductible plan and the company wants to reimburse employees for the first $400 worth of expenses, the reimbursement is allowed under section 105.

The major difference between section 105 and the HRA is that section 105 is based on the plan year only, and that does not allow rollovers or cash outs of the money.

Also note that, unlike fully insured plans, section 105 discrimination rules apply to self-funded plans.

[GBurns]

leevena

I am curious about where you found out that section 105 MERPS "..... were used primarily in the ag business, mostly small farmers".

I have never heard that claim before and do not remember even AgriPlan saying that, but who knows?.

I have no opinion, I am just filling my research and knowledge, so to speak.

[leevena]

GBurns...can't really remember. I am somewhat of a benefits junkie and tend to read as much as I can. I also taught the subject at university and other locations over the years. Since it was the late 40's or early 50's, I was not around so I do not know the specific reason(s) they were created, but I do remember that the plans became popular with ag business/small farmers for some reason.

[Guest Wislndixie]

Thanks everyone for the posts. I think the employer will want to use the HRA. Now, let me ask this. How hard are the HRA's to self-administer? We're talking about a group of 16 employees and 11 dependants. How would you self-administer?

Thanks again

Wisln

[leevena]

There are a couple of issues that come to mind when you ask "how hard is it to self-administer" an HRA? By the way, my suggestion is that you hire an administrator. You need plan documents, plan design, communication materials, decision how what expenses are eligible for HRA reimburesement, claim adjudication, claim payment (check issuance), someone at the employer needs to set up privacy safeguards, account balance activities, discrimination testing, and compliance testing.

If your group is capable of doing all of this, let them self-administer. If not, pay the $ for someone who can.

[GBurns]

I suggest that you take heed of leevena's advice.

I do not think that any employer should get involved in claims adjudication. Be the last point of appeal but do not handle the day to day decisions etc. Plus there are the privacy and notice etc issues that might apply either now or when larger.

[Guest JimD-EBR]

More food for thought...the MERP is paid from the general assets of the employer (an unfunded plan). The HRA can be paid from the general assets of the employer, or if the liability becomes too great (due to the carryover provisions) the employer may choose to make the HRA a funded plan requiring a trust, audit, and annual report (5500).