By: HUB’s EB Compliance Team
Deductibles can be useful for plan design and to help minimize plan costs, but they can also present compliance challenges. This can be particularly so when trying to maintain the health savings account (“HSA") compatibility of high deductible health plans (“HDHP”) in conjunction with a health reimbursement arrangement (“HRA”).
High-Deductible Minimums And Higher Deductible Health Plans
HDHPs allow eligible individuals to contribute to an HSA. HSAs provide the account holders with the ability to save for health expenses on a pre-tax basis and receive reimbursements for health expenses tax-free. In exchange for the tax-savings, HSA-qualified HDHPs have strict rules governing minimum deductibles. Coverage under a HDHP cannot have a deductible less than the HDHP minimum amount set by the IRS each year for self-only or family coverage. However, as a cost-saving measure, many plans have a deductible that is higher than the HDHP minimums.
Generally speaking, no medical expenses can be paid by the HDHP or any other applicable coverage, such as an HRA, before the minimum deductible is hit (there are certain limited exceptions, like preventive care). A post-deductible HRA is one way to provide HRA benefits without interfering with the HSA eligibility.
Managing Post-Deductible HRA Distributions for HDHPs with Higher Deductibles
However, the minimum deductible rule poses challenges for post-deductible HRAs. Some companies choose to ease the burden of a higher-than-required deductibles by providing HRA coverage that helps reimburse expenses above the HDHP minimum, but before the higher plan deductible is reached. For HDHPs, these reimbursements must be made after the individual has satisfied the minimum HDHP deductible or else employees will not be able to contribute to an HSA.
For example, with regard to family coverage the IRS has explained, “a plan is an HDHP only if, under the terms of the plan and without regard to which family member or members incur expenses, no amounts are payable from the HDHP until the family has incurred annual covered medical expenses in excess of the minimum annual deductible” (see, IRS Notice 2004-02, Q/A-3). Of course, the “no amounts” here includes certain limited exceptions, like preventive care, but the principle creates challenges for employers with these plans.
This means that for self-only coverage, the HRA may not reimburse medical expenses until at least the self-only coverage deductible amount of $1,500 in 2023 has been met (this is true even if the actual plan deductible is set at $3,000). For family coverage (any tier other than self-only coverage, such as employee + spouse or family), the minimum deductible a single person in the family must meet before the HRA may reimburse medical expenses is $3,000.
Insurance Carrier Challenges
HRAs administered by the insurance carrier are typically designed around the plan deductible for self-only or family coverage. Thus, if the insurance carrier will also administer the post-deductible HRA, they may not release funds until the higher plan deductible is met. If the employer’s intent is to provide HRA funds as soon as the IRS minimum is met, another HRA solution may be necessary, such as self-administering or hiring a third party administrator.
An employer who self-administers their post-deductible HRA (all other compliance concerns aside) or contracts with a third party administrator to administer the HRA may be able to accomplish this goal as long as the tier of coverage can be determined at the time reimbursement is being considered. Reimbursement from the HRA may be made (and HSA eligibility can be preserved) for:
- self-only tier coverage once $1,500 of the deductible is met
- family tier coverage once $3,000 of the deductible is met by one person
This can be a good solution for family coverage that has an “embedded” deductible, which is an individual, lower deductible inside a family deductible. Once the individual hits this lower threshold, the plan pays as if the individual hit the deductible, even if the total for the family is less than the overall family deductible. HUB has discussed these in more detail here. In these cases, the above reimbursement formula will help keep the HRA on the right side of the IRS minimums.
Takeaways
By including these questions as part of an initial checklist for the HRA claim review, the HRA Administrator can help maintain HSA eligibility for its HDHP plan participants:
- Does this claimant have self-only tier coverage? If so, HRA payment can be made after $1,500 (for 2023) deductible has been met.
- Does this claimant have employee + spouse, employee + child, or family coverage? If so, HRA payment can be made after a single family member has met $3,000 (for 2023) of their family deductible.
Post-deductible (or in this case, post-minimum deductible) HRA coverage can be a helpful benefit for employees to ease the burden of higher-than-required deductibles. However, the compliance challenges must be considered before implementing, and while administering, this type of benefit.
One more simplified approach may be to simply lower the deductible. However, that approach may result in increased premiums. Therefore, from a cost modeling perspective, it may be better for the employer to bridge the gap between the HDHP minimum deductible and the plan’s higher deductible with an HRA.
If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.
NOTICE OF DISCLAIMER
Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.