Is an HRA Disqualifying Coverage? Probably, But . . .

Health Savings Accounts and Health Reimbursement Arrangements typically don't mix. But there are exceptions.

Employers who create a Health Savings Account program for their employees need to be careful about other medical benefits that they offer to their workers. These other benefits - as benign as they may seem - may disqualify participants from opening and making or receiving contributions to a Health Savings Account.

Let's set the stage and review the key compliance concepts.

Health Savings Account Eligibility

Workers don't need to meet any special eligibility criteria, beyond the requirements to enroll in any other medical coverage, to sign up for coverage on an HSA-qualified plan. These rules are set by the federal and applicable state government, the insurer, and the employer. They include waiting periods; eligibility based on hours worked; coverage for domestic partners, ex-spouses, and adult children; location; and residence.

Federal tax law alone determines who's eligible to open and make or receive contributions to a Health Savings Account. States, insurers, and employers can't add to or subtract from these requirements. They include the design of the medical plan, other disqualifying coverage, and dependent status.

Under federal tax law, an individual must be covered on an HSA-qualified plan to be HSA-eligible. And when the person is covered by more than one plan, each plan must meet the definition of HSA-eligible coverage. That definition includes a provision that all care except select preventive services be applied to a deductible of at least $1,400 (self-only coverage) or $2,800 family coverage).

Health Reimbursement Arrangements

There are a handful of distinct HRA designs. For our purposes, we refer to the design that's integrated with a medical plan. In a typical design, a company offers a plan with a high deductible, then sets up an HRA to help employees manage their out-of-pocket financial responsibility. For example, the medical plan has a $4,000 family deductible, and the HRA reimburses the first $2,000 of the deductible. This design typically leaves more than half of all families with no net deductible responsibility after HRA reimbursement.

HRAs are considered a separate medical plan under federal tax law, leaving covered employees covered on two distinct plans: the medical coverage and the HRA. If employees want to open and make or receive contributions to a Health Savings Account, both the medical plan and the HRA must independently be defined as HSA-qualified coverage.

When the Combination Is Disqualifying

The example above illustrates a design that's disqualifying. The employee is enrolled in coverage with a $4,000 family deductible. As long as all services except select preventive care are applied to the deductible and no family member has an embedded (personal) deductible less than $2,800, the plan is HSA-qualified.

But the HRA doesn't meet the definition. It reimburses the first $2,000 of deductible expenses. Thus, it's medical coverage that applies no diagnostic services or treatments to a deductible of at least $2,800.

Since an employee covered by more than one plan isn't HSA-eligible unless all coverage is HSA-qualified, employees who enroll in this program can't open and make or receive contributions to a Health Savings Account.

They can still enroll in the program and enjoy the benefits of the HRA.

They can participate in the employers Health FSA, which they can fund to reimburse their miscellaneous out-of-pocket medical (including deductible), dental, vision, and over-the-counter expenses because Health FSA eligibility requirements aren't based on the design of other coverage.

When the Combination Isn't Disqualifying

Many employers pair an HSA-qualified plan with an HRA design that doesn't disqualify employees from opening and making or receiving contributions to a Health Savings Account. This design is referred to as a Post-Deductible HRA.

A Post-Deductible HRA is structured so that it's integrated with the medical plan but doesn't reimburse any medical expenses until the employee (or family) have incurred at least $1,400 or $2,800 in deductible expenses, depending on whether the plan covers only the employee (self-only coverage) or at least one other family member (family coverage).

The design would look like this:

• Medical plan: $4,000 family deductible.
• HRA: Reimburses all deductible expenses (and possibly post-deductible coinsurance and other cost-sharing) once the family has incurred at least $2,800 of deductible expenses.
• Family: Responsible for the first $2,800 of deductible expenses, which can be paid from Health Savings Account balances (the employer can contribute some or all of this $2,800 directly to employees' accounts) or personal funds.

This design isn't disqualifying because the employee is covered by two medical plans (the medical coverage and the HRA), both of which meet the definition of an HSA-qualified plan.

When employers have offered an HRA plan with a carryover of unused balances, employees (like me more than a decade ago) are often reluctant to abandon a plan that covers most of their deductible and abandon that HRA balance to move to an HSA-qualified plan. Employers can't roll over those unused HRA balances to help employees transition to a Health Savings Account program.

But employers can roll over those unused balances into a Suspended HRA (employees can access the balance if they ever switch from the Health Savings Account plan back to their former coverage) or Retirement HRA (employees have access to the funds once they leave the company and meet certain other criteria set by the employer relating to age, years of service, and account balance). In both cases, because employees can't reimburse expenses from the HRA whey they simultaneously participate in a Health Savings Account program, the HRAs aren't disqualifying.

Final Thought

Many employers use offer HSA-qualified plans with high deductibles to their employees. T his is a form of limited self-insurance, with some up-front exposure (up to the deductible) and then insurance coverage thereafter. Some of these employers aren't establishing Health Savings Account plans. In those cases, they often pair the medical plan with an HRA that reimburses the first portion of the deducitble or one that begins to reimburse expenses below the statutory minimum annual deductible for that contract type. Those employers and their benefits advisors can ignore this article. (Sorry to inform you after you've read it!)

But if the goal is to combine additional premium savings with a lower net deductible and give employees an opportunity to open and make or receive contributiosn to a Health Savings Account, the strategy outlined above is a viable and complaint design.

I'm director of strategy and compliance at Benefit Strategies, LLC, a provider of Health Savings Accounts and other tax-advantaged benefits. You can read my biweekly Health Savings Account GPS blog and subscribe by clicking here and my weekly HSA Wednesday Wisdom and occasional Healthcare Update column published on LinkedIn. I've also created your Health Savings Academy, an educational resource for financial and benefits professionals, as well as employers and account owners. My book, HSAs: The Tax-Perfect Retirement Account , is the definitive guide to navigating the intersection of Health Savings Accounts, Medicare, and retirement planning. It's available in book and e-book forms from Amazon.

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