IRS Guidance Outlines Permissible Arrangements

Background
An HRA is an arrangement funded solely by an employer that reimburses employees for qualified medical expenses up to a maximum dollar amount for a coverage period. An HSA is a tax-exempt trust or custodial account established by an employee to pay and save for qualified medical expenses on a tax-free basis. The employee, the employer, or both may contribute to an employee's HSA up to a maximum annual dollar amount.

Permissible Arrangements
An employee's participation in an HRA generally disqualifies the employee (and employer) from making contributions to his or her HSA. However, an employee can make contributions to an HSA while covered under a high deductible health plan (HDHP) and one or more of the following arrangements:

• Post-deductible HRA: This arrangement does not pay or reimburse any medical expenses incurred before the minimum annual deductible amount is met. The deductible for this arrangement does not have to be the same as the deductible for the HDHP, but benefits may not be provided before the minimum annual deductible amount is met.
• Limited-purpose HRA: This arrangement can pay or reimburse the items listed here (see "Other health coverage."), except long-term care. Also, this arrangement can pay or reimburse preventive care expenses because they can be paid without having to satisfy the deductible.
• Suspended HRA: Before the beginning of an HRA coverage period, the employee can elect to suspend the HRA. The HRA does not pay or reimburse, at any time, the medical expenses incurred during the suspension period, except preventive care and items listed here (see "Other health coverage."). When the suspension period ends, the employee is no longer eligible to make contributions to an HSA.
• Retirement HRA: This arrangement pays or reimburses only those medical expenses incurred after retirement. After retirement, the employee is no longer eligible to make contributions to an HSA.

For more information, please read IRS Publication 969.

Note: The rules with respect to structuring employee health care arrangements are complex. Employers are strongly encouraged to contact knowledgeable employment law counsel or a tax specialist for individualized guidance.

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