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Introduction to Health Reimbursement Arrangements “HRAs”

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City of Sarasota. Introduction to Health Reimbursement Arrangements “HRAs”. Presented by: Mark R. Wilkerson, CFP HRA Consultant December 1, 2004. Topics. HRA Team Growing Need HRA Basics HRA Advantages Eligible Expenses Trust Structures

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City of Sarasota

Introduction to Health Reimbursement Arrangements “HRAs”

Presented by:

Mark R. Wilkerson, CFP

HRA Consultant

December 1, 2004

topics
Topics

HRA Team

Growing Need

HRA Basics

HRA Advantages

Eligible Expenses

Trust Structures

Adoption Implementation and Ongoing Administrative Process

Group Structures & Voting

Contribution Requirements

Employer Funding Sources

Aggressive HRA Plan Designs

VALIC National HRA Plan

hra service team
HRA Service Team
  • Combining:
    • AIG VALIC - education and enrollment expertise and resources
    • HRA Consultants - HRA experience
    • Rehn & Associates, Inc. - HRA third party administration experience
aig valic
AIG VALIC
  • Education Services
  • Enrollment Services
  • Special Pay Plan Companion
hra consultants a division of vsg
HRA Consultants, a Division of VSG
  • 21 years HRA consulting experience with governmental employers
  • 7 trust clients
  • Single or multiple employer plans
  • 30,000+ participants
  • 400+ employers
  • Custom or turnkey plans
rehn associates inc
Rehn & Associates, Inc.
  • TPA with more than 40 years experience
  • 11 years HRA experience
  • 30,000+ HRA accounts
  • 400+ HRA participating employers
  • Employer billing services
  • Individual participant services
  • Claims adjudication
  • Account service
  • Statement generation
  • Online participant account access
  • COBRA Administration
  • HIPAA Compliance
growing need for hras post employment medical funding
Growing Need for HRAs(post-employment medical funding)

The projections listed above are the amounts that a Washington retiree and spouse could spend during their lifetime assuming retirement at age 60, participation in the State of Washington PEBB Uniform Medical Plan, living a normal life expectancy to age 84, assuming purchase of medical insurance and dental insurance for retiree and spouse, plus annual out-of-pocket expenditures of $500 on non-covered items. We assume 5% annual increases for premiums and non-covered out-of-pocket costs.

Current PEBB premiums before age 65 for retiree and spouse are $7,700 per year for medical insurance and $850 per year for dental insurance. Current PEBB Medicare supplement premiums are $3,500 per year for retiree and spouse.

monthly growth example
MonthlyGrowth Example

What will my account be worth when I retire?

Starting Age

Monthly Employer Contribution

Balance at age 65 w/ 5% return

25

$100

$148,856

35

$100

$81,870

45

$100

$40,746

55

$100

$15,499

40 000 cash out without an hra
$40,000 Cash-Out Without an HRA

$40,000 available

25% federal income tax

7.65% FICA tax

40,000

Cash

$

Taxes

13,060

-

26,940

Net Cash

$

40 000 with hra contribution
$40,000 With HRA Contribution

$40,000 benefit available

$

40,000

Benefit

Taxes

0

-

$

40,000

HRA Balance

hra basics
HRA Basics
  • Provide reimbursements of medical expenses only
    • In-service and/or post-retirement
  • Employer contributions only (no contribution limits)
  • Reimbursements limited to account balance
    • Carry forward from year to year
  • IRS Notice 2002-45, HRAs
  • Revenue Ruling 2002-41, HRAs
  • Revenue Ruling 2004-45 – Coordinating HSAs, HRAs, & FSAs
employee participant
Employee/Participant
  • Advantages
    • Tax-free
      • Contributions
      • Earnings
      • Withdrawals for qualified expenses
    • Excellent resource to pay the rapidly rising cost of post- employment health care
    • List of qualified expenses is quite extensive
    • Portable
    • Unused balances carryover
    • Allocated accounts with ability to self-direct investments
employee participant cont
Employee/Participant (cont.)
  • Disadvantages
    • Limited to medical only
    • Group contributions and decision process
employer
Employer
  • Advantages
    • FICA savings
    • Offer employees new benefit
    • Solution to job-locked employee problem
    • Means of pre-funding retiree health care obligation
    • May choose vesting schedule for post-employment benefits
employer cont
Employer (cont.)
  • Disadvantages
    • 105(h) non-discrimination rules apply
    • New benefit requires assistance with administration
    • New cost if custom plan used
who s expenses are eligible
Who’s expenses are eligible?
  • Employee/retiree
  • Spouse
  • Qualified dependents
qualified insurance premiums
Qualified Insurance Premiums
  • Medical
  • Dental
  • Vision
  • Long-term care (tax-qualified)
  • Medicare Part B
  • Medicare supplements
qualified expenses
Qualified Expenses
  • Expenses defined in Internal Revenue Code Section 213(d)
  • Medical, dental, and vision expenses not paid by insurance
    • Co-pays, deductibles, co-insurance
    • Prescription and certain over-the-counter drugs (OTC)
    • Crowns
    • Eyeglasses, etc.
trust structures
Trust Structures
  • Expertise in both 501(c)(9) VEBA and 115 trusts
  • VEBAs
    • VEBA stands for “voluntary employees’ beneficiary association”
    • Rely on 501(c)(9) letter of determination from IRS
    • Stand alone VEBA more expensive to develop and maintain than a multiple employer turnkey plan
    • Multiple employer VEBA subjects employers to non-discrimination violations of other employers
trust structures cont
Trust Structures (cont.)
  • Individual 115 trusts
    • 115 trust also known as governmental integral part trust
    • No legal approval required for HRA offered within 115 trust
      • Rely on private letter rulings
    • Private letter ruling may optionally be obtained by individual employers
    • Insulates employer from non-discrimination violations of other employers
adoption implementation and ongoing administrative process
Adoption Implementation and Ongoing Administrative Process
  • Employer Responsibilities
    • CBA or Employer Policy
    • Adopt Adoption Agreement Plan and Trust
    • Contributions
    • Notify TPA of employee eligibility for distributions
    • Instruct TPA of any forfeiture reallocations of unvested accounts
    • Notify TPA of COBRA events
adoption implementation and ongoing administrative process1
Adoption Implementation and Ongoing Administrative Process

Turnkey Plan – Services Provided

New employee education

Enrollment

Participant service

Claims

Account statements

Website

COBRA Compliance

HIPAA Compliance

Audit/Tax forms filed

contribution requirements
Contribution Requirements
  • Must be employer contributions
  • Collective bargaining or employer policy change can recharacterize compensation from salary to employer HRA contributions
  • All employees defined as eligible must be treated uniformly
  • Must eliminate individual choice of salary vs. HRA contribution
  • More flexibility in collective bargaining groups
employer funding sources
Employer Funding Sources
  • Sick leave or vacation leave cash-outs (terminal payments)
    • Cash choice must be eliminated
  • Other leave cash-outs
  • Monthly employer contributions
  • Unused monthly benefit dollars
  • Percent of pay (group salary reduction)
    • Through collective bargaining or for post-employment benefits only
  • Other
group structures voting no individual choice
Group Structures & Voting – No Individual Choice!
  • Collective Bargaining Groups/Non-Represented
    • Termination Payment Contributions
      • Vote each collective bargaining agreement or annually
      • Members “eligible” to retire may vote
      • Can split-percent in cash and percent to HRA
    • Monthly Contributions
      • Percent of pay
      • Flat dollar amount - $100
      • Eligibility may vary by age or pension plan or other criteria – CBA only
aggressive hra plan designs
Aggressive HRA Plan Designs
  • Medical benefits plus severance, death, and small account cash-outs (disqualifies 105(b) exclusion)
  • Individual election of salary or sick leave (contributions probably subject to income and employment tax withholding)
  • After-tax contributions (probably no exclusion from income on earnings or benefits)
  • Claim account is not an HRA
  • Questions? - Call IRS Office of Chief Counsel Employee Benefits Division: (202)622-6080
valic national hra plan
VALIC National HRA Plan
  • 115 trust
  • Employer self-trusteed
  • 12 mutual fund options
  • 1 money market fund
  • 5 – 50 BP fund management expense
  • Per participant fee
  • BP administrative fee
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