Implementing HRA Mid-Year

[Guest PBJ]

Employer is switching from a regular health plan design (high premium but a smaller deductible) to a High Deductible Health Plan and an HRA effective June 1, 2008. The rest is somewhat confusing because I keep hearing "terms of art" that I do not think really apply. So please bear with me.

Prior medical plan has a $100 p/person deductible. Plan Change is effective June 1st Medical Plan Deductible is $2000. HRA Plan is the employee must pay $200/person first, then the employer will pay the remaining $1800 at 100%. The question is: We know that deductible satisfied under medical plan will carry over to satisfy a higher deductible under the medical plan due to a plan change. But can any deductible satisfied under the medical plan by the employee prior to June 1st be credited toward satisfying the HRA deductible ($200)?

Clearly, this is very confusing. First, I thought that HRA is Employer Only. However, I think the idea is that the employee must spend $200 before the employer will reimburse. How do you work that in mid-year?

And, I thought that the HRA could not reimburse expenses that were incurred prior to the time it was in existence.

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Any thoughts ??

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[J Simmons]

But can any deductible satisfied under the medical plan by the employee prior to June 1st be credited toward satisfying the HRA deductible ($200)?

If the HRA is written that way, yes.

I thought that HRA is Employer Only. However, I think the idea is that the employee must spend $200 before the employer will reimburse. How do you work that in mid-year?

HRA must be ER only dollars. EE dollars can only be involved on a tax-free basis if the IRC 125 is met with regards to the EEs' elections, and the use it or lose it rule applies--then it would actually be a health flex account.

What you describe is a $200/year HRA deductible. An EE's payment of the first $200. The dollars that the EE would be paying that $200/deductible would not be tax free (though would count towards Schedule A itemization, subject to the 7.5% of AGI threshold). Only the ER dollars that would be paid per the HRA for medical expenses in excess of the $200/year would be tax-free.

To work that in mid-year, the HRA could provide either (a) that the expenses incurred from January 1-May 31 under the old plan be credited to the employee towards the $200 deductible for 2008, or (b) prorate the $200 annual deductible by 7/12's and not give any credit for the January 1-May 31 expenses.

And, I thought that the HRA could not reimburse expenses that were incurred prior to the time it was in existence.

You're right. But either way you handle the new HRA's $200/deductible for 2008 (#(a) or #(b) above), that's not reimbursing expenses incurred before the HRA exists. It is a condition for reimbursement of an expense incurred after the HRA comes into existence.