Health Reimbursement Arrangements (HRAs) Presented by: Cafro Agency, LLC David L. Cafro, CIC (860) 779-DAVE

Health Reimbursement Arrangements (HRAs) An HRA is an IRS-approved tax-favored benefit that reimburses employees for qualified medical care expenses not reimbursed by an employer's health plan. Benefits include but are not limited to: – Co-payments – Co-insurance – Prescription drugs – OTC medicines – Out of pocket medical expenses – Dental/Vision expenses – Premiums (Health, LTC, LTD) 1. Internal Revenue Service. Health savings accounts and other tax-favored health plans. For use in preparing 2007 returns. Publication 969 (2007).Health savings accounts and other tax-favored health plans. For use in preparing 2007 returns.

Health Reimbursement Arrangements (HRAs) May be offered in conjunction with other employer-provided health benefits. Employers have complete flexibility to offer various combinations of benefits in designing their plan. You do not have to be covered under any other health care plan to participate. Self-employed persons are not eligible for an HRA.

Benefits of an HRA Contributions made by your employer can be excluded from your gross income Reimbursements may be tax free for paid qualified medical expenses Any unused amounts in the HRA can be carried forward for reimbursements in later years.

Why Offer An HRA? Allows employees more power in their health care decisions! When coupled with either a high deductible health plan (HDHP) or a conventional PPO insurance, it provides coverage that serves the needs of both employers and employees. When combined with an HDHP, costs are usually lower than most conventional designs. Prevents employees from being fully impacted by the cost of health insurance.

Employer Advantages of a HRA Employer – Designs a benefit program that allows control and a number of ways to save on costs. Sets the annual contribution amount. Decides if the plan is with or without rollover. Retains any remaining HRA benefits when an employee leaves the company. Chooses – – "Who Pays First”– the HRA or the employees. – Maximum amount that the HRA can accumulate at any one time. – Percentage at which the HRA will reimburse claims. – Insurance design to pair with the HRA. – Whether the HRA will be stacked with an HSA or FSA

Employer Advantages Reimbursements made through the HRA are tax-deductible to employers. Employers retain remaining HRA benefits if an employee leaves the company. There is no cash-out option for employees, limiting cost exposure. An HRA/High Deductible Health Plan combo can lower employer cost of providing medical coverage. Employers only provide what is needed to reimburse actual claims when they are paid. An HRA motivates employees to think seriously about choices such as brand name vs. generic drugs or whether to use emergency rooms in non-emergency situations. This may help lower health care costs in the long-term.

Employee Advantages Employer Contribution = Added Employee Benefit Reimbursements – – Not considered employee taxable income – Minimize employees out-of-pocket expenses – Limit employees’ cost exposure with ‘wise’ HRA use – May actually result in no out-of-pocket expenses at all Can lower the amount employee’s pay for coverage

How An HRA Works On a regular basis, the employer provides a pre-determined amount to an account on the employee’s behalf. Employees have access to that account through the submission of reimbursement request for qualified medical expenses. Qualified medical expenses are defined in the benefit materials received.

HRA Contributions The maximum annual contribution is determined by the employer's plan document. There may be a cap amount for the HRA Contributions to an HRA HRAs are funded solely through employer contributions and may not be funded through employee salary deferrals under a cafeteria plan. These contributions are not included in the employee's income. Employees do not pay federal income taxes or employment taxes on amounts employer contributes to the HRA. Amount of Contribution There is no limit on the amount of money the employer can contribute to the accounts. Additionally, the maximum reimbursement amount credited under the HRA in the future may be increased or decreased by amounts not previously used.

HRA Distributions Generally, distributions from an HRA must be paid to reimburse employees for qualified medical expenses incurred. The expense must have been incurred on or after the date employee is enrolled in the HRA. Debit cards, credit cards, and stored value cards may be provided by the employer towards reimbursement. If the use of these cards meets certain substantiation methods, additional information may not need to be provided to the HRA. If any distribution is, or can be, made for other than the reimbursement of qualified medical expenses, any distribution (including reimbursement of qualified medical expenses) made in the current tax year is included in gross income.

– If an unused reimbursement is payable in cash at the end of the year, or upon termination of employment, any distribution from the HRA is included in employee’s income. This also applies if any unused amount upon a death is payable in cash to their beneficiary or estate, or if the HRA provides an option for you to transfer any unused reimbursement at the end of the year to a retirement plan. – If the plan permits amounts to be paid as medical benefits to a designated beneficiary (other than the employee's spouse or dependents), any distribution from the HRA is included in income. However, if, before August 15, 2006, the plan contains such a provision, this rule will not apply until plan years beginning after December 31, 2008 HRA Distribution Examples

Qualified Medical Expenses Qualified medical expenses are those specified in the plan that would generally qualify for the medical and dental expenses deduction as explained in Publication 502, Medical and Dental Expenses. Although non-prescription medicines (other than insulin) do not qualify for the medical and dental expenses deduction, they do qualify as expenses for HRA purposes. Qualified medical expenses from an HRA include – – Amounts paid for health insurance premiums. – Amounts paid for long-term care coverage. – Amounts that are not covered under another health plan.

An HRA Plan Thus the employee can – - Use the first $500 and pay nothing out of pocket, then - Spend the next $500 completely out of pocket, then - Be covered by the traditional insurance plan. If the first $500 is unused at the end of the year it is then rolled over to next year. Three Parts:DescriptionExample Set yearly amount given by the employer Money the employee can spend completely, no deductible $500 or $1000 Bridge amount Money the employee has to pay out of pocket $500 or $1000 Traditional insurance plan Typically those amounts will be $500, $500 and 90% respectively.

In Summary...Why Offer An HRA? In today’s economy, employers must make the tough decision of increasing the cost of health care to their employees or decrease the amount of health coverage. An HRA can be a powerful alternative Purchase of a high deductible health coverage providing – - Quality coverage - At an affordable rate; and - Subsidizing the employee’s out-of-pocket coverage through HRA funding Employer saves money -- while employees... - Enjoy affordable health care - At a rate that all can afford - With added choices and control for the employee