HSA/HRA Combo. Not Always Oil-and-Water, but Be Careful . . .

Yes, you can design a Health Reimbursement Arrangement that allows employees to remain HSA-eligible. But make sure your HRA design is compliant.

An employer can combine a company-funded Health Reimbursement Arrangement integrated with an HSA-qualified medical plan without disqualifying enrolled employees from opening and funding a Health Savings Account. But the HRA must follow a specific design so as not to disqualify workers enrolled in the program.

Health Savings Account Eligibility

In general, individuals must meet three requirements to become eligible to open and fund a Health Savings Account:

1. Their medical coverage must be HSA-qualified.
2. They can't qualify as someone else's tax dependent.
3. They can't be enrolled in disqualifying coverage.

The first two requirements are straightforward. The third is tricky. And one of the trickiest aspects is HRAs.

As defined in the federal tax code, an HRA is a medical plan. It's a self-insured plan designed and funded by an employer to reimburse a portion of covered medical expenses incurred by an employee and enrolled family members. Being covered by more than one plan isn't disqualifying by itself. But whether you're covered by one or two or even five plans, you lose your opportunity to open and fund a Health Savings Account if any of your coverage is disqualifying. Thus, the challenge is to design an HRA that meets the requirements of an HSA-qualified plan.

Defining an HSA-qualified HRA

Fortunately, there is an option that fits the bill. It's called a Post-Deductible HRA. It has a minimum deductible equal to or higher than the statutory minimum annual deductible for an HSA-qualified plan ($1,500 for self-only and $3,000 for family coverage in 2023 - figures thar are unofficially projected to increase by $100 and $200 in 2024). In other words, the plan doesn't reimburse any non-preventive services before an enrollee has incurred that level of qualified expenses and paid them with other funds (like Health Savings Account distributions or personal assets).

Example: Red Hawk Realty increases the self-only deductible on its HSA-qualified plan from $2,000 to $4,000 on renewal. The company sets up a Post-Deductible HRA that reimburses the final $2,000 of the deductible, thereby keeping employees' deductible responsibility the same. The HRA doesn't disqualify employees because they have a net deductible of $2,000, which is higher than the statutory minimum annual deductible of $1,500.

This example is a standard design - the HRA reimburses the remainder of the deductible after the participant is responsible for at least the statutory minimum annual deductible. But there are variations. After the statutory minimum deductible is satisfied (this is a constant in the design of an HSA-qualified HRA), the HRA can:

• Reimburse some of, but not all the remaining deductible (in our example above, perhaps reimbursing deductible dollars $2,000 through $3,500, then having the employee assume responsibility for the final $500.
• Reimburse some or all of coinsurance (for example, the HRA reimburses the remaining deductible, then 15% of the 20% coinsurance imposed after the deducible is satisfied).

The design of the HRA after the statutory minimum annual deductible is satisfied doesn't matter to determine whether an enrolled employee is HSA-eligible. Employers can be creative. But in general, the simpler the HRA design, the better.

One note: Some insurers have underwriting rules that limit the amount of financial responsibility that the HRA can cover. The rationale is simple: If the insurer prices the plan in the example above by projecting utilization against a $4,000 deductible, and the employee is responsible for only the first $2,000 of deductible expenses, the utilization may be different with employees' lower out-of-pocket exposure. Be sure to check with your insurer before designing your plan.

Why Offer the Combination?

Of course, an employer can simply purchase a plan with a lower deductible to reduce employees' out-of-pocket responsibility and skip the HRA (and the administrative cost of running that program). So, why not do so?

First, the premium is lower, which saves both the employer and employee money. The savings are particularly pronounced for healthy employees, who enjoy lower payroll deductions without the burden of responsibility for higher claims that they don't incur.

Second, the premium may not be priced to reflect actual utilization. If the premium difference between the $2,000- and $4,000-deductible plans is less than the projected difference in utilization, the employer can come out ahead. Don't think that plans are always priced correctly. Insurers may respond to a market influence, seek to gain membership in a particular plan, or simply miss the mark on expected utilization.

Third, an HRA design may engage employees in the price of care. When they reach the deductible on a $2,000 plan and the insurer reimburses all claims thereafter (or imposes only small copays on certain services), employees and their family members don't see prices and are less likely to shop for care. On the other hand, if the plan has a $4,000 deductible with an HRA that reimburses the final $2,000 by check or direct deposit to the employee (who's then responsible for paying the provider bill with the HRA funds), the employee continues to see pricing on provider bills (even if the HRA provides the funds to pay the expense).

Fourth, the HRA can be seen as a partnership between the employer and workers to manage out-of-pocket expenses. The two parties share responsibility for deductible expenses before the insurer begins to pay claims.

What about Remaining Balances?

Employers can design an HRA to allow or not allow a carryover of unused balances. A carryover can be an attractive feature of a first-dollar (no deductible) HRA, since an employee with lower claims one year can carry over her unused funds to apply to a future year's qualified out-of-pocket expenses. (I had several years in which carryovers covered 100% of my deductible responsibility.

Carryovers into the following year are problematic with Post-Deductible HRAs, since the HRA can't reimburse any expenses below the statutory minimum annual deductible.

Example: If Red Hawk allows a carryover and an employee doesn't use all her HRA funds in 2023. If the carryover were applied to her 2024 HRA, a carryover amount of more than $400 would result in the HRA's reimbursing expenses before the $1,600 projected statutory minimum annual deductible in 2024. She wouldn't be eligible to open or fund a Health Savings Account.

The simple solution is to not allow a carryover. Another option is to allow employees to carry over some of or all the unused balance into one of two other HRA designs that aren't disqualifying:

Retirement HRA. The employer can set up a second HRA for employees. Unused balances can flow into this retirement HRA, which can't be accessed until an employee retires and meets certain requirements defined by the employer.

Example: Red Hawk Realty credits a Retirement HRA with unused balances. But the employee can access the money only if she worked for the business for at least seven years, was at least 60 when she left the company, and had a balance of $5,000 or more. If she fails to meet any of those requirements, she can't access the funds.

Suspended HRA. The company funds an HRA that the employee can't access during a year that she wants to open and fund a Health Savings Account. But she can spend the funds in other years.

Example: Red Hawk Realty credits a Suspended HRA with unused balances. The employee can't access the funds during a year that she funds a Health Savings Account. But if she switches plans during a future open enrollment (or loses her eligibility to fund a Health Savings Account, for example, she enrolls in Medicare), she can then use the accumulated Suspended HRA balances to offset qualifying expenses as defined by the company.

HSA-qualified Plan and Disqualifying HRA

There is no requirement that an employer offer a Health Savings Account program with an HSA-qualified plan. A company can choose an HSA-qualified plan to maximize premium savings, then integrate a first-dollar HRA to reimburse some of or all deductible expenses.

Example: The Bears' Den, a Central Texas sports bar, offers employees an HSA-qualified plan with a $5,000 self-only deductible. The bar reimburses the first $3,500 of deductible expenses, which leaves few workers with any deductible responsibility. This benefit design doesn't allow employees to open and fund a Health Savings Account. But they appreciate that the reimbursement account will cover all their actual deductible expenses in a typical year.

The Bottom Line

A good rule of thumb: If you see an HRA integrated with an HSA-qualified plan, you should raise a red flag in your mind. But don't automatically conclude that the plan is disqualifying. The design of the HRA determines whether employees can open and fund a Health Savings Account.

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