[FOCUS ON BENEFITS] Managing Health Care Costs

There’s some new and good news for pest management company employers looking for ways to control or even reduce their company’s health-care costs. That these costs have been rising dramatically over the past several years should come as no surprise to business owners and managers. Last year alone many employers throughout the United States experienced average health insurance premium increases of 25 to 28 percent, while many others received increases exceeding 35 to 45 percent, according to Tim Pederson, an employee benefits consultant and administrator in Hartland, Wis.

On July 15, the U.S. Treasury Department and the Internal Revenue Service (IRS) issued a notice and revenue ruling that cleared the way for employers to adopt a new type of health plan that could control or even reduce health care costs, Pederson said. The new guidance consisted of IRS notice 2002-45 and Revenue Ruling 2002-41, which clarified the tax treatment of Health Reimbursement Arrangements (HRAs). Benefit professionals have previously referred to these plans as “Defined Contribution Health Care Accounts” or “Personal Care Accounts.” The IRS now refers to these plans as “HRAs.”

The guidance stated in part that medical benefits paid by HRAs that meet certain requirements are not taxable to employees. In addition, there are two main components of an HRA: It must be entirely funded by an employer; and it may only reimburse benefits for substantiated medical expenses. The guidance also allows for the carryover of unused reimbursement amounts into future years.

WHAT THIS MEANS. With this clarification, Pederson says a “green light” has been given to employers across the country to provide a new way to manage health-care costs. An HRA, he explains, is a plan that incorporates patient-directed features, more choices for employers and employees when purchasing health care, as well as tax advantages.

“HRAs are beneficial because employees can direct how the HRA health-care dollars are spent. In addition, if an employee does not use the account, the unused portion can be carried over to future years for use at a time when it may really be needed. This is an incentive for employees to be more discerning consumers of health care, which can potentially help to control health-care costs,” he said.

Pederson said that many employers may consider establishing an HRA when implementing higher deductible medical plans. “These typically have lower monthly premiums than more traditional lower deductible plans, which generally have tremendously higher monthly premiums. The premium savings on a higher deductible plan will provide employers with money to help fund HRAs for their employees. Also, employers can define the amount of nontaxable HRA money that they want to provide to employees and can better manage plan costs.”

An HRA should not be confused with the well-known Flexible Spending Accounts (FSAs). Pederson says HRAs allow for the carryover of unused amounts into the next year, while the FSA has a “use-it-or-lose it” provision that does not allow money to be rolled forward into future years. “In addition, the HRA is totally funded by the employer and an FSA is typically funded by employee salary reductions. Neither plan, however, allows an employee to cash out funds at the end of the year,” he says.

“Lastly, HRAs are not subject to the complex plan design rules that FSA plans are required to meet. However, the reimbursements made to employees under an HRA must be for substantiated medical expenses.”

The IRS ruling and notice allows an employer to use both an HRA and FSA. The former can be designed to allow the FSA to reimburse expenses first, prior to a payment from the HRA. The IRS says that this would permit a more efficient use of the two plans and would address the previous requirement that an FSA be a payer of “last resort.”

Pederson added that HRAs are also considered group health plans subject to
COBRA continuation requirements. They may also allow former employees, including retirees, continued access to the unused dollar amounts even if they do not continue the employer medical plan.

“It’s important to remember than an HRA is simple and does not have complex plan design requirements,” he says. “The IRS ruling provides employers with an opportunity to better manage rising health-care costs while preserving choice for their employees.

“For many, the HRA is the right answer at the right time, as employers look for ways to cut their skyrocketing health-care costs,” he continued. “This type of benefit development has not occurred for many years and is encouraging for thousands of health-care weary employers. If you provide health insurance to your employees it would be well worth your time to investigate the advantages of implementing an HRA — the new way of managing health-care costs.”

Pederson’s company, Diversified Benefit Services Inc., has specialized in the design, communication, compliance and third party administration of flexible benefit plans, FSAs, deductible reimbursement plans and cafeteria plans for more than 15 years. He is now adding the design, communication and third-party claims administration of HRAs to his service offerings for employers.

The author is a freelance writer from Milwaukee, Wis., who has been reporting on the pest control industry for many years. He can be reached at jfox@pctonline.com.