Your executive-level employees expect solid compensation and a robust executive benefits plan. Employee benefit reimbursement plans for health care expenses have provided one way to fill in gaps left by normal group health plans, ensuring that your business leaders are properly covered. However, it is important to understand how IRS rules apply to different arrangements.
Health Reimbursement Arrangement and Group Health Plan
In the simplest terms, a medical expense reimbursement plan refunds employees for covered medical costs.
There are several types of health reimbursement arrangements, and they work with group health plans in different ways. For example:
- In an individual coverage health reimbursement arrangement, the health reimbursement arrangement is offered in place of a group health plan, allowing employees to purchase a health plan on their own. Healthcare.gov says that employees must be enrolled in individual health plans, such as a Marketplace plan, to use the funds. This may be a good option for employers that want to simplify their health plan administration while giving employees flexibility.
- Integrated health reimbursement arrangements are designed to work with the group health plan. Even with health insurance, dental insurance and vision insurance, employees tend to end up with some out-of-pocket costs that aren’t covered by their various plans. A benefit reimbursement plan offers a way to cover these costs.
- Excepted benefit health reimbursement arrangements are designed to cover costs that are not covered under group health plans. According to Investopedia, the maximum benefit in 2022 is $1,800. Employees may enroll in an excepted benefit HRA regardless of if they enroll in the group health plan.
Covering Out-of-Pocket Expenses and Medical Expenses
According to the Commonwealth Fund, more than one in 20 Americans under the age of 64 spent at least $1,700 on out-of-pocket medical expenses in 2017. Furthermore, high out-of-pocket costs primarily affect people who have employer coverage and earn above 600 percent of the federal poverty level.
Employees may face uncovered costs in numerous ways:
- They have to pay a share of the premium for insurance.
- They have to pay a deductible.
- They have to pay a copay or coinsurance when they receive care or fill prescriptions.
- They have to pay a higher cost for care from specialty doctors.
- They have to go out of network to receive care, and these costs are not covered or are not fully covered by the plan.
- They have to pay for over-the-counter medicines that are not covered by the plan.
All of these costs can add up. If an employee or a member of the employee’s family experiences a medical emergency, the costs can add up quickly. A health reimbursement plan gives employers a way to cover these costs.
Comparing HRAs, HSAs and FSAs
HRAs may sound like Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs), but there are key differences.
- HRAs: According to the IRS, only employers are allowed to contribute to HRAs. This means that employees are not allowed to contribute, and these accounts cannot be funded via employee salary reductions under a cafeteria plan. HRAs are owned by the employer.
- HSAs: These accounts are owned by the employee; so the employee can keep the account when switching jobs or retiring. HSAs are designed to work with high deductible health plans, and both the employer and the employee may contribute up to the annual contribution limit. Funds do not expire.
- FSAs: These accounts are owned by the employer; so they are not portable. Both the employee and the employer may contribute, but funds expire if they are not used within a certain period of time.
The Tax Benefits of Health Reimbursement Arrangements
Employees generally do not pay taxes on health reimbursement arrangement funds used on eligible health care expenses. Specifically, the IRS says that contributions to health reimbursement arrangements are not included in taxable income. Additionally, reimbursements used to pay for qualified medical expenses are not taxed.
The IRS maintains information on rules for health flexible spending accounts, health reimbursement arrangements and other tax-favored health plans in Publication 969. The following expenses are generally allowable in health reimbursement arrangements:
- Over-the-counter medicine and menstrual care products (these expenses are allowable as of Jan. 1, 2020).
- Amounts paid for health insurance premiums.
- Amounts paid for long-term care coverage.
- Amounts that aren’t covered under another health plan.
- Various expenses that would generally qualify for the medical and dental expenses deduction, as covered in IRS Publication 502.
Certain expenses are listed in Publication 502 as generally not allowable. These expenses include life insurance premiums, income protection premiums, childcare, marijuana or other controlled substances that are illegal under federal law, cosmetic surgery, funeral expenses, maternity clothing, nutritional supplements, household help and personal items such as toothbrushes, among other things. See Publication 502 for more information on what is and is not generally allowable.
Note that employers will need to comply with IRS rules in order to maintain these tax benefits.
Non-Discrimination Rules and Highly Compensated Individuals
If you want to provide employee benefit reimbursement arrangements to your executives, you will need to be aware of how non-discrimination rules may impact your offerings.
The IRS says that certain limits may apply for highly compensated participants. Depending on the type of plan that you offer, your plan may be subject to non-discrimination testing.
Offering a Medical Reimbursement Plan
If you are interested in offering a medical reimbursement plan as part of your executive benefits plan, you will need to take the following steps.
- Decide on a type of health reimbursement arrangement that you want to offer. There are different types of HRAs, and they are subject to different IRS rules, restrictions and contribution limits.
- Identify who is eligible. Pay attention to IRS rules for highly compensated individuals.
- Set a maximum benefit. IRS contribution limits may apply depending on the type of plan you are providing.
- Explain the reimbursement process. Employees will need to know which expenses are covered and what they need to do to receive a refund.
- Explain who is covered. The reimbursement arrangement can benefit current and former employees as well as spouses, dependents and children under the age of 27.
- Educate executives on the benefit. Benefit participation rates can be low when employees are unaware of the plan or do not understand how it works. Make sure employees know about the plan and remind them to use their benefits.
- Explain what happens to remaining funds at the end of the year. The IRS says that funds can typically roll over to the next year.
- Manage enrollment. Because this benefit is provided at no cost to eligible employees, enrollment may be automatic when eligibility requirements are met.
Should you offer employee benefit reimbursement plans?
To attract top talent, you need to offer top benefits. A generous employee benefit reimbursement plan can help your company stand out among your competition.
When crafting an employee benefit reimbursement plan, it’s important to make sure you are complying with IRS rules. If you need help putting together an attractive benefits package, Higginbotham can help. Learn more about our employee benefits services.