You Can Preserve an HRA Balance and Try an HSA if . . .

You've built a Health Reimbursement Arrangement balance that you don't want to lose if you test-drive an HSA and subsequently don't like it. There are two solutions.

In the last Monday Mythbuster column, we explored transfers of balances between Health Savings Accounts and other health accounts are and aren't permitted. You can read that article here. To summarize:

Health FSA to Health Savings Account. Not permitted.

HRA to Health Savings Account. Not permitted.

Medical Savings Account to Health Savings Account. Permitted.

Health Savings Account to Health Savings Account. Permitted.

Individual Retirement Account to Health Savings Account. Permitted once per lifetime, with transfer limits and a 12-month testing period during which you must remain HSA-eligible.

Let's dive into the compliance issue and, as promised two weeks ago, describe two HRAs that can hold an employee's accumulated balance as the worker enrolls in an HSA-qualified plan and opens and funds a Health Savings account.

The Compliance Issue

Traditional HRAs fall under the definition of a medical plan in the federal tax code. Someone (in the case of an HRA, only the employer) pays a premium in exchange for the promise to reimburse certain medical expenses if they are incurred. This arrangement is no different from a major medical plan except that the range of services covered is narrower and the total value of reimbursement is fixed.

Because a traditional HRA integrated with a medical plan, which pays the first dollars of qualified deductible expenses, reimburses diagnostic and treatment services before the patient satisfies the statutory minimum annual deductible for an HSA-qualified plan ($1,600 for self-only and $3,200 for family coverage in 2024), this coverage is disqualifying. Anyone covered by this HRA design can't open or fund a Health Savings Account during the plan year.

My Experience

I was ready to open and fund a Health Savings Account as early as 2006. The problem: My company offered a medical plan with a $1,000 deductible per family member, up to $2,000 annually. The HRA reimbursed the first $1,000 of deductible expenses, regardless of which family member received the care. I could carry over any unused funds, up to the value of the $2,000 deductible.

My son, then in elementary school, and I were healthy, so I quickly built a balance of nearly or up to $2,000 in the HRA. I had little or no deductible responsibility. Our good health had created, in effect, a first-dollar (or near-first-dollar) medical plan.

Then, I was married and suddenly added four family members, including three more active children, to the plan. Over time, given the law of larger numbers, we whittled down the value of the HRA to the point that I had almost no balance to carry over into 2009. At that point, I jumped on to the HSA-qualified plan, with a $3,000 aggregate deductible (no individual family member deductible) and a $1,000 employer contribution to a Health Savings Account. My wife and I have been covered by five HSA-qualified plans with four employers since.

Another Solution

Between 2006 and 2008, I didn't want to lose that HRA balance that I could carry over to reimburse a portion of the second half of my deductible. The risk was that I forfeited that balance, enrolled in the HSA-qualified plan, didn't like it, and wanted to return to the plan with the HRA (and higher payroll deductions for premium). I'd have lost that HRA balance forever.

My employer could have sponsored one of two HRAs that would have allowed me to try the Health Savings Account without permanently forfeiting my accumulated HRA balance.

Suspended HRA

Under this approach, my employer would have placed my balance into a Suspended HRA. This is simply an account that houses an accumulated HRA balance that I can't touch during that plan year. Because I don't have access to the funds when I'm enrolled in HSA-qualified coverage, I don't lose my eligibility to open and fund a Health Savings Account. If I later chose to rejoin the HRA plan, the stored balance would have been deposited into my new HRA.

An employer has wide latitude in designing a Suspended HRA. The most common feature is to void the balance after a certain number of years. For example, the company may permit an employee to carry an HRA balance in a Suspended HRA for three years. If the worker enrolls in a non-HRA plan during each of the next four years, the balance (which is merely a bookkeeping entry, not actual cash in an account) reverts to the company.

Why would a company offer a Suspended HRA? If it wants to move employees from the plan with the integrated HRA to the HSA-qualified plan, a Suspended HRA encourages workers to do so without the risk of losing their accumulated balance if they choose another plan during a future enrollment period.

Why wouldn't a company offer a Suspended HRA? This HRA is a liability that the company must record and may need to pay in the future. Also, the company pays a monthly administrative fee on these accounts.

Retirement HRA

A company can design a retirement HRA to hold accumulated balances until covered employees meet the requirements to access the funds in the future. Because employees can't tap these balances before meeting the requirements, they can become HSA-eligible as these funds are held pending future use.

Example: The company can design a Retirement HRA so that any employee who enrolls in the HSA-qualified plan with an HRA balances can roll over those funds into a Retirement HRA that can be accessed if the worker accumulates 10 years of service and leaves employment at age 60 or later.

Retirement HRAs can be used not only as a vehicle to permit employees with a balance to retain that money as they open and fund a Health Savings Account, but also as part of a broader retirement offering.

Example: Ink, Inc., a printing company, sponsors a plan with a $3,000 deductible and an HRA that reimburses the first half of the deductible. Employees can roll over all unused HRA funds. The company always wants employees to have skin in the game (assume responsibility for some deductible expenses), so it caps the HRA (with carryover) at $2,400. Any additional carryover that healthy employees accumulate year-to-year is transferred to a Retirement HRA. Employees can access these funds if they retire from Ink, Inc. at age 60 or later, have worked there at least five years, and have accumulated a balance of $2,000 or more. They have five years to spend the money on qualified medical, dental, and vision expenses once they retire and satisfy the other requirements.

A retirement HRA like this encourages employees to continue to be prudent medical shoppers because they retain the spending power of any unused balances. It meets the company's goal of ensuring that no employee, no matter how healthy, has no deductible responsibility.

Why would a company offer a Retirement HRA? This design may be attractive to employees who worry about paying for medical care in retirement. And it achieves the company's goal of incentivizing employees to think about what care they receive and where they receive it, since they never lose potential access to a dollar of HRA reimbursement saved.

Why wouldn't a company offer a Retirement HRA? It may carry a financial liability on its book for years, perhaps decades, before an employee either spends or forfeits the balance. It pays monthly administrative fees on these accounts.

The Bottom Line

A Suspended HRA is the perfect design for a company that wants to encourage employees who've accumulated HRA carryover balances to test-drive a Health Savings Account without losing future access to the HRA balance. The Retirement HRA is a more versatile account that can achieve that goal and be part of a broader program to help workers prepare for medical expenses in retirement.

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HSA Monday Mythbuster is published every other week, alternating with HSA Question of the Week on Mondays. The content of this column is informational only. It is not intended, nor should the reader construe the content, as legal advice. Please consult your personal legal, tax, or financial counsel for information about how this information applies to you or your entity.