What is a Post-Deductible Health Reimbursement Arrangement (HRA)?

And when employers should consider adopting one

Written by William G. (Bill) Stuart

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The rule of thumb around Health Reimbursement Arrangements (HRAs) and Health Savings Accounts (HSAs) is that an HRA disqualifies an employee from opening or funding an HSA. That’s generally true – but not always. It’s important to understand when an employer can integrate an HRA into their benefits mix to reduce medical premiums, help employees pay their out-of-pocket expenses, and still allow workers to fund an HSA.

Post-Deductible HRA

There are a handful of different HRA designs that can reimburse out-of-pocket expenses in a group medical plan, premiums for nongroup coverage, and retiree premiums and out-of-pocket expenses. Our focus is the HRA integrated with a medical plan.

HRAs are defined as self-insured medical plans under federal tax law. That designation has some important implications, including:

  • COBRA continuation rights
  • the opportunity for adult children to be covered through age 26
  • potential conflicts with other coverage

It’s the last point that’s most relevant to Health Savings Accounts (HSAs). Under federal tax law, anyone who wants to open an HSA can’t qualify as another taxpayer’s tax dependent, must be enrolled in HSA-qualified coverage, and can’t have any disqualifying coverage. Employees enrolled in a medical plan with an integrated HRA are covered by two distinct plans: the medical coverage and the HRA. They can’t open and fund an HSA unless both plans are HSA-qualified.

An HRA meets the definition of an HSA-qualified plan if it doesn’t begin to reimburse any services below $1,400 for self-only coverage or $2,800 for family coverage hence the name Post-Deductible. These figures represent the statutory minimum annual deductible for an HSA-qualified plan in 2021 and 2022. Note that the deductible figure used in determining whether an HRA meets the definition of a qualified plan is the statutory minimum deductible, not the medical-plan deductible.

Example: An employer offers an HSA-qualified medical plan with a deductible of $4,000 for self-only coverage. The company adds an HRA that begins to reimburse all deductible claims after the employee is responsible for the first $1,500 of deductible expenses. In this case, neither the standard medical plan nor the HRA reimburses any claims before the statutory minimum deductible minimum of $1,400. Therefore, this two-product combination is HSA-qualified.

When to deploy a Post-Deductible HRA

There are no rules on when an employer can or can’t add a Post-Deductible HRA to its coverage mix. Here are some common situations in which employers consider this approach:

  • High premium increase. Companies facing a sharp increase in the renewal premium on their medical coverage can add a Post-Deductible HRA strategically to help reduce the increase without increasing employees’ out-of-pocket costs.

Example: A company receives a 22% premium increase on its plan with a $1,500 deductible. It can reduce that increase by raising the deductible to $4,000 and adding a Post-Deductible HRA to reimburse all deductible expenses above $1,500. The employer, not the insurer, incurs the claims risk between $1,500.01 and $4,000 for each employee in exchange for a premium less than the initial renewal quote.

  • Increased consumerism. People tend to be more prudent spending their own money than someone else’s. Thus, the higher the deductible, the more they’re responsible for medical spending before the insurer begins to pay claims. Employers can use a Post-Deductible HRA to maintain employee engagement at higher levels of spending while simultaneously reducing the financial burden for those who need care. And because the company – not the insurer – controls the design of the HRA, it can create the optimal cost-sharing design that meets its and its workers’ needs.

Example: A company chooses a plan with a $5,000 self-only deductible. It adds a Post-Deductible HRA that begins to pay 75% of claims between $1,400 and $5,000. The employee is responsible for the first $1,400. After that point, the employee faces, in effect, 25% coinsurance. If the employee incurs $5,000 of claims, she’s responsible for the first $1,400 plus 25% of the next $3,600 ($900) – a total of $2,300.

  • Adjusted deductible. Insurers usually offer deductible options in $500 or $1,000 increments (such as $1,500, $2,000, and $3,000). A company may want a different deductible. An example might be to share the effect of medical inflation with employees. If the deductible is $2,000 and medical inflation is 5%, the company may want to raise the deductible to $2,100 – a level that most insurers don’t offer. But the company can switch to a plan with a $3,000 or $4,000 deductible and add a Post-Deductible HRA whose trigger point (the dollar figure after which the HRA assumes claims responsibility) adjusts from $2,000 to $2,100 and to a higher figure each succeeding year.

The Post-Deductible HRA and HSA contributions

The presence of a Post-Deductible HRA doesn’t affect participating employees’ annual HSA contribution limits ($3,650 and $7,300 in 2022, plus a $1,000 catch-up contribution for account owners age 55 or older). There is no offset to the contribution limit based on the value of the Post-Deductible HRA or actual reimbursements received by any employee.

Employers can still contribute to their workers’ HSA. A company may increase the self-only medical plan deductible from $2,000 to $5,000 to reduce premiums, integrate a Post-Deductible HRA that reimburses all claims above $2,000 to limit the financial responsibility of employees, and contribute $750 to employees’ HSAs to reduce further their out-of-pocket financial responsibility. (In an extreme design, the company can contribute up to the statutory limit to each employee’s HSA, thereby eliminating any net out-of-pocket costs.) In designing the integrated HRA/medical-plan offering, an employer must balance a desire to help employees manage their out-of-pocket responsibility and the natural disincentive for employees to become prudent consumers of medical services when their financial responsibility is reduced.

The Post-Deductible HRA and Health FSA participation

Many employers sponsor a Health FSA program that allows employees to receive a portion of their pay as a pre-tax payroll deduction into a Health FSA. Participating employees can then spend their election on qualified medical, dental, and vision goods and services, as well as over-the-counter drugs, medicine, equipment, and supplies. A Post-Deductible HRA doesn’t affect employees’ opportunity to elect up to the company limit to the Health FSA. Employees can enroll in a Limited-Purpose Health FSA (reimbursing dental- and vision-related expenses only – services that an integrated Post-Deductible HRA can, but rarely does, reimburse) without disqualifying themselves from funding an HSA. Other employees who aren’t eligible to fund an HSA (including those who waive coverage) can enroll in a general Health FSA (which reimburses medical, dental, and vision services, plus over-the-counter items).

When to adopt a Post-Deductible HRA?

A Post-Deductible HRA can be designed to increase consumerism and create a desired balance between employee out-of-pocket responsibility, claims utilization, and total premiums. The financial benefits can be greater in certain situations than others.

  • Small company with favorable claims experience. Under federal law, premiums for medical coverage at companies with 50 or fewer employees are based on the community rate (a pooling of all claims from employees and dependents of small companies in the rating area) rather than on that company’s claims experience. This pricing feature is intended to reduce the effect of a handful of high claims on a small company that might otherwise receive a renewal premium so high that it may not be able to afford to continue to offer coverage. Small companies with a healthy workforce are overcharged in this pricing model and subsidize small companies with higher claims. The healthy company can’t negotiated better premiums based on its better claims experience. But it can raise the deductible – effectively self-insuring the first $5,000 of claims – to reduce the premium and reimburse 100% of claims above $1,500 for self-only coverage. It’s not unusual for a company to pay less than half the total potential claims liability that the HRA covers (although plan design and claims experience do affect total reimbursement, and no level of reimbursement is guaranteed).

Unfortunately, many insurers don’t provide claims information to small companies due to privacy concerns. Even de-identified information can often be matched easily to specific employees or families when the employee population is small. Without these reports, a small employer can only guess at the health of his employees and their family members based on workers’ attendance. The company doesn’t know whether, for example, an employee maintains his presence at work as a spouse cares for a child with high claims.

  • Large company. The larger the company, the more the insurer relies on that firm’s claims to set future premiums. And self-insured companies feel the financial impact of claims directly. Thus, a company with good claims experience will receive preferred rates.

A Post-Deductible HRA can still play a role by increasing employee consumerism. When an insurer pays all claims above a $2,000 deductible, for example, employees and their dependents don’t see the price of care and are less likely to shop based on price and quality than if they’re financially responsible. But when the company selects a plan with a $4,000 deductible and integrates a Post-Deductible HRA that pays all claims above $2,000, the employee sees and must pay attention to the first $4,000 (not $2,000) in claims. Yes, the HRA reimburses the final $2,000, but an HRA that pays the employee directly (rather than the provider) requires the employee to reconcile more provider bills with the insurer’s explanations of benefits. That process can reinforce the price of care.

This combination can be particularly powerful if, for example, the employer allows workers to carry over a portion of their unused funds into an HRA that reimburses their dental and vision expenses during the following year. The employer benefits from lower claims costs, which in turn temper future premium increases. The employee enjoys a portion of the fruits of these savings, but shares the savings with the company. It can be a win-win proposition when designed optimally.

Summary

Just as traditional HRAs deliver flexibility to employers and both incentives and savings to employees, a well-structured Post-Deductible HRA design can integrate with an employer’s HSA program to deliver the same benefits. The key to a successful program is to create (first-year) and refine (future years) a plan design that strikes the balance between lower premiums (enjoyed by both company and workers), out-of-pocket costs (borne by employees), and reimbursement costs (paid by employers).

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This information is provided by Voya for your education only. Neither Voya nor its representatives offer tax or legal advice. Please consult your tax or legal advisor before making a tax-related investment/insurance decision.

Health Account Solutions, including Health Savings Accounts, Flexible Spending Accounts, Commuter Benefits, Health Reimbursement Arrangements, and COBRA Administration offered by Voya Benefits Company, LLC (in New York, doing business as Voya BC, LLC). HSA custodial services provided by WEX Inc. For all other products, administration services provided in part by WEX Health, Inc.

This highlights some of the benefits of these accounts. If there is a discrepancy between this material and the plan documents, the plan documents will govern. Subject to any applicable agreements, Voya and WEX Health, Inc. reserve the right to amend or modify the services at any time.

The amount saved in taxes will vary depending on the amount set aside in the account, annual earnings, whether or not Social Security taxes are paid, the number of exemptions and deductions claimed, tax bracket and state and local tax regulations. Check with a tax advisor for information on whether your participation will affect tax savings. None of the information provided should be considered tax or legal advice.

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