Is an HRA Compatible with a Health Savings Account? Depends on Design.
by your Health Savings Academy | Posted on LinkedIn
A Health Reimbursement Arrangement is usually disqualifying coverage. But not always.
The rule of thumb in Health Savings Account eligibility is that anyone who receives funds from a Health Reimbursement Arrangement is disqualified from opening or funding a Health Savings Account. But there is a common HRA design that's not disqualifying. Learn more about why HRAs are often disqualifying, the design that is not disqualifying, and why a company might want to integrate an HRA with an HSA-qualified plan in this week's edition of HSA Monday Mythbuster.
Defining an HRA
An HRA is a program that reimburses employees for certain qualified expenses defined by the employer (within the confines of federal tax law). Key elements of the program:
It's integrated with a traditional medical plan and usually is structured to offset a portion of deductible (or deductible and coinsurance) expenses. (Note: There are other forms of HRAs, but we focus on this one, by far the most common, in this article.)
It is funded solely by the employer. Employees can't contribute, either directly (for example, through payroll deductions) or indirectly (for example, by paying more for coverage than an employee who enrolls in the same medical plan without the HRA).
The employer defines the key elements of the program, determining the value of the HRA, choosing qualified expenses (from a list set by federal tax law), deciding whether the HRA or the patient pays the first dollars of qualified expenses, selecting the recipient of reimbursements (the employee or the medical provider), and setting the rules for carryover of unused funds (if the company permits this option).
Example 1: The employer increases the medical-plan deductible from $1,000 to $2,500 and reimburses the second half of the new higher deductible (all deductible expenses above $1,250).
Example 2: The company reimburses the first half of the medical-plan deductible and allows employees to carry over all unused balances up to the value of the deductible.
The Clash between HRAs and Eligibility to Fund a Health Savings Account
Under the federal tax code, the HRA is considered a medical plan. Thus, coverage that integrates a medical plan and an HRA constitutes two different medical plans. Individuals who want to open and fund a Health Savings Account can't be enrolled in coverage that's not HSA-qualified. If they have more than one medical plan, all must be HSA-qualified.
A design like the ones in the examples above is disqualifying. An HSA-qualified plan must have a deductible of at least $1,400 (self-only coverage) or $2,800 (family plan) and apply all diagnostic services and treatments to the deductible. In the first example above, a medical plan (the HRA) begins to reimburse diagnostic and treatment claims after $1,250 of deductible expenses. In the second example, the HRA provides first-dollar coverage. Anyone enrolled in either arrangement - even those who never receive a cent of reimbursement from the HRA - is disqualified from opening or funding a Health Savings Account.
The Path to Eligibility
There is a way to integrate an HRA with an HSA-qualified plan without disqualifying an enrollee from opening and funding a Health Savings Account. The key: make sure that the HRA is HSA-qualified. The most common approach is to design the HRA so that it doesn't reimburse any services before an employee with self-only coverage incurs at least $1,400 in non-preventive care or a worker with family coverage incurs at least $2,800 of diagnostic services and treatment (these figures represent that statutory minimum annual deductible for an HSA-qualified plan in 2021 and 2022 and are indexed for inflation).
Example: A company offers a medical plan with a $4,000 self-only and $8,000 family deductible. It integrates an HRA that reimburses diagnostic services and treatments after the employee assumes responsibility for the first $1,500 (self-only) or $3,000 (family) of deductible expenses.
In this example, employees have two medical plans, and each meets the definition of an HSA-qualified plan. They're not reimbursed for any diagnostic services or treatments before they've assumed financial responsibility for claims equal to or exceeding the statutory minimum annual deductible for an HSA-qualified plan.
This design is called a Post-Deductible HRA. It's post-deductible because it doesn't begin to reimburse qualified expenses until after the statutory minimum annual deductible (not the medical-plan deductible) is satisfied. Employees enrolled in this coverage can fund their Health Savings Account to the statutory limit ($3,600 and $3,650 for self-only and $7,200 and $7,300 for family coverage in 2021 and 2022) - regardless of how much they're reimbursed from the Post-Deductible HRA.
Why Not Just Buy a Plan with a Lower Deductible?
Good question. And there is a good answer. Sometimes, it's less expensive to purchase coverage with a higher deductible and then backfill a portion of the deductible with an HRA. There are many reasons why this may be so - reasons beyond the scope of this article. But pricing anomalies - sometimes strategic, sometimes inadvertent - aren't uncommon in medical coverage.
Sometimes, employers prefer the certainty of lower premiums and uncertain levels of HRA reimbursement to the certainty of higher premiums on a medical plan with the same net deductible as the HRA option. The larger the employer, the more predictable the annual cost of the HRA reimbursement.