This information is only to be used as general information and not
to be construed as legal advice or opinion.
Here is an overview of these specialized medical plans that are allowed
under IRS regulations.
What is a MERP?
It is the old workhorse that has been around for a long time, the
acronym stands for Medical Expense Reimbursement Plan. It is an
employer funded plan that pays a certain amount to an employee and
their dependents for medical expenses that are not otherwise paid by
the health plan.
The eligibility requirements for a MERP are the same as those for a
cafeteria plan, meaning that self-employed, owners of an S-Corp, and
partners are not eligible to participate.
A MERP may be a very simple plan or rather complex. It is highly
flexible to suit a company's needs. It can be as simple as the employer
agrees to pay a part of a deductible of a major medical policy or as
complex as the employer paying a portion of the deductible, then part
of the co-insurance and even a benefit that is not covered under the
major medical, such as chiropractic treatment or a wellness check up.
This can be a very useful tool in lowering insurance premiums without
reducing the amount of benefit coverage to the employees.
BAS has been providing plan documents and administering these plans for
several years.
What is an HRA?
It is a Health Reimbursement Account. These were set up to be an
employer funded account for the payment of medical expenses not covered
in another manner. An employer would fund this type of plan to a
certain amount per employee per year. Similar to a MERP, but any amount
from 0% to 100% not used in a plan year could be rolled over into the
next plan year depending on the how the plan document was set up.
It was felt that there were several draw backs to these plans. The
first was that the money that the employee accumulated was not required
to be set up in a trust or separate account of any sort. While an
employer could set the money aside it was not required so there was not
guarantee that the money would be there when the employee submitted a
claim for it. This money was suppose to be available at any time, even
years down the road. The employer could also be faced with an unfunded
liability.
Another drawback was that it had to be entirely employer funded.
Yet another drawback is that these plans were not portable, if an
employee leaves then his HRA remains with the former employer and the
employee would have to file any future claims with that employer.
It is believed that with the creation of the new HSAs that the HRAs
will rapidly disappear from the scene.
BAS has never been sold on the value of an HRA to the employer or
employee, and while we have the capability to do the administration
work we have never been involved in one.
Now to the latest from the IRS: What are the new HSAs?
These are Health Savings Accounts that was part of the Medicare
Prescription Drug, Improvement and Modernization Act of 2003 that
Present Bush signed into law in December of 2003.The final regulations
have not been released and probably will not be until the summer of
2004; however the IRS has released guidelines for them.
These appear to be a lot better for both the employer and employee, and
address many of the drawbacks of the HRAs. Unlike HRAs the money set
aside for a HSA has to be deposited in an account similar to an IRA, so
a bank or mutual fund company would be holding the money. While the all
the accounts from one employer can be co-mingled in one account, each
individual has to be tracked separately.
Each individual has complete control over their account, there is no
vesting. An individual can withdraw money from their account at any
time or move it to another custodian at any time.
Who is eligible to have an HAS? Here is another difference between the
HRA and HSA. Anyone who has a High Deductible Health Plan (HDHP)
including the self-employed, owners, partners, etc. can open a HAS. A
HDHP is defined as an insurance policy that has at least a $1,000
deductible for an individual and at least a $2,000 deductible for
family coverage (any coverage other than individual, i.e. employee and
spouse). The maximum out of pocket for an individual is $5,000 and
$10,000 for a family. There can not be any payment for services before
the deductible is met except for a wellness benefit, or if a plan has a
doctor office co-pay or a prescription drug card with a co-pay the plan
is not a HDHP.
Furthermore, (don't you just love the simplicity of government rules?)
if it is family coverage then the family deductible of $2,000, whether
by one family member or several members, must be met before there is
any payment.
Another big change is that the employer, employee and/or both can
contribute to the HSA within the limits. The contributions are limited
to the deductible or $2600 ($5150 for family) whichever is less, and is
based the accumulation of monthly eligibility. For example: if a person
starts on a HDHP in June they would take the annual limit divide it by
twelve for the monthly limit, then times it by 7 for the remaining
months in the year to arrive at their limit for the year.
Section 125 (or cafeteria plans) has been changed to allow the
contributions to be deducted pre-tax.
If an individual has a HDHP and is covered by another plan that is not
a HDHP then they would not be eligible for a HAS. The IRS is allowing
coverage by supplemental plan, dental and vision plans without losing
eligibility. If an employee elects coverage by a Flexible Spending
Account (FSA) under a cafeteria plan then they are not eligible for a
HSA. An employer can offer both a cafeteria plan with a FSA and a HAS
but an employee can only choose one or the other. If an individual is
eligible for Medicare then they are not eligible for a HSA.
An administrator (probably a TPA) is not required for a HSA however
they are going to make life a lot easier for the employer that wants to
set up a HSA. The TPA will provide the plan documents, track the
individual accounts, process claims, track eligibility and limits for
individuals, and work with the custodian to prepare the IRS reporting.
In processing claims, the TPA can not refuse an individuals request to
withdraw money, but they can warn the individual that the withdraw may
not be for qualified medical expenses and would be subject to penalty.
In tracking eligibility and limits the TPA can help insure that there
are not excess contributions. The TPA can also help the employer in
complying with the "comparable employee rule" (i.e. all employees with
comparable coverage). Contributions are considered comparable if all
employees with comparable coverage are receiving either the same amount
or same percentage of the deductible under the HDHP.
BAS is working hard to establish partnerships with custodians, develop
plan documents and procedures for administering HSAs.
This is just a short overview of the information that the IRS has
released, for more information you can use the following web link to
view an IRS Q&A release on the HSAs:
http://www.irs.gov/pub/irs-irbs/irb04-02.pdf
