Health Reimbursement Accounts: Navigating Compliance Landmines

By: Emily D. Zimmer and Lynne S. Wakefield, K&L Gates LLP.

This article discusses how to design and operate compliant employer-sponsored health reimbursement accounts (HRAs) under the Internal Revenue Code (I.R.C.), with a particular focus on the Patient Protection and Affordable Care Act (ACA).

WITH CONTINUED INCREASES IN HEALTH CARE COSTS and the evolution of the post-ACA health care marketplace, HRAs are an increasingly common feature of employers’ benefits packages for both employees and retirees. The increased prevalence of HRAs suggests that for many employers, the cost savings and flexibility that can be achieved through the use of HRAs outweigh the risks arising from the complex legal framework within which HRAs must be designed and administered. Although there are, in fact, many benefits to using HRAs, this is not an area in which employers should tread lightly. There are numerous compliance risks, pitfalls, and traps for the unwary associated with the design and administration of HRAs, particularly under the ACA and related guidance.

Introduction to HRAs

An HRA is a notional account that an employer credits with dollar amounts that may be used to pay or reimburse eligible health care expenses incurred by participants and their eligible dependents. No specific section of the I.R.C. created the concept of HRAs. Rather, Internal Revenue Service (IRS) guidance issued beginning in 2002 describes a particular type of health care expense reimbursement arrangement, referred to as an HRA, that can include a carryover feature, qualifies for tax-favored treatment under I.R.C. §§ 105 and 106, and is subject to the non-discrimination requirements under I.R.C. § 105(h).

HRAs are self-funded group health plans that are subject to the same mandates that apply to traditional major medical plans. However, due to the unique nature of HRAs, the impact of the group health plan mandates on HRAs and traditional major medical plans can be different.

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Emily D. Zimmer is a partner with K&L Gates focusing her practice on employee benefits, including advising private and public companies with respect to the design, implementation, and administration of qualified and non-qualified retirement plans and welfare benefit programs. She has experience in a wide range of employee benefit and executive compensation issues, including issues related to corporate mergers and acquisitions. Lynne Shore Wakefield is a partner with K&L Gates focusing her practice on employee benefits. Notably, she regularly assists private and public companies with ACA, HIPAA, COBRA, and ERISA compliance; the negotiation of administrative services agreements; the design, implementation, and administration of group health plans, cafeteria plans, wellness programs health savings accounts (HSAs), and health reimbursement arrangements (HRAs); and other aspects of consumer-driven healthcare.

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