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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


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
  • 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













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








Net Cash


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

$40,000 benefit available









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
  • 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
  • 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


Participant service


Account statements


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