Bright Future Seen for HRAs

July 3, 2002 ( - Recently issued tax clarification about health care reimbursement arrangements (HRA) is likely to prompt more employers to adopt an HRA as a low-cost benefit alternative, according to Hewitt Associates.

A Hewitt report said the recent Internal Revenue Service guidance describes a plan that typically includes a high deductible medical insurance program along with an HRA to help consumers fund needed medical expenses.

Hewitt said many benefits executives view the plan dealt with in the IRS bulletin as a lower-cost alternative to traditional HMO coverage, which Hewitt said are demanding an average 2003 price increase of 22%

“Support” Groups
In more than 30 employee focus groups conducted by Hewitt some key themes emerged that support this point:

  • Just 9%of participants said they would definitely enroll in a catastrophic design with a spending account if offered
  • More than one-third (35%) of participants believe that, as a consumer, they can influence health care costs
  • 29% believe that enough information exists today to research health plan or provider decisions
  • 30% believe that the best doctors charge the most.

According to the IRS, employers are allowed to fund HRAs (often called personal care accounts) in which unused balances will roll over from year to year for employees electing the specific coverage option. The accounts must be funded entirely with employer money and may not be funded through salary deductions.

The accounts can be used to reimburse out-of-pocket medical expenses for active and former employees, including retirees. And, unlike current Section 125 flexible spending arrangements (FSAs), HRA accounts can be used to reimburse premiums for other health coverage, including COBRA premiums.

The guidance allows considerable flexibility in the way that employers fund the accounts and make broader plan design decisions, according to Hewitt.