Changes implemented through the Affordable Care Act (ACA) limit an employer’s ability to provide an HRA to active employees ONLY in conjunction with the employer’s health insurance plan. However, an employer is not restricted to providing an HRA for employees once employment is severed.
Remember the employer is the only one allowed to design and fund the HRA plan and this has allowed employers to become very created in their plan design to recruit and retain employees as long as the employer does not discriminate in favor of Key Employees* or Highly-Compensated Employees.*
* A highly compensated employee (HCE) is defined as any employee whose pay is in the top 20% of compensation for that company. A Key Employee is defined as an employee who at any time during the immediately preceding plan years was: A 5% owner (owning more then 5% of the business) or related to a Key Employee.
Government employers, in particular, have used the post-employment HRA as a means to provide a tax-free benefit in retirement that is financially sustainable to the employer and flexible and meaningful to the employee. It has also been a means to encourage former employees to plan ahead for their health care needs and shop for the right health plan coverage in preparation for retirement. The flexibility of a post-employment HRA allows the former employee to:
- Save the HRA dollars for reimbursement of health plan premiums until they are needed. Most HRA plans do not require the former employee to immediately begin submission of reimbursable expenses
- Budget the HRA dollars to last as long as possible. Some examples might be:
- The retiree becomes employed, and the new employer offers health insurance coverage. The retiree may request that his or her premium contributions be deducted after tax so that the expenses qualify for reimbursement from the HRA. Thus, the retiree is able to tax advantage of the new employer’s benefit and pays his or her share of the premiums with tax-free HRA dollars from the prior employer.
- Similar to the retiree become re-employed, the retiree may be added to his or her spouse’s health insurance plan. Now the spouse requests that their employer deduct employee contributions after-tax. Keep in mind that a change in deductions from pre-tax to after tax can only occur once per year at renewal of the employer’s health plan. So, the retiree and spouse should plan a head regarding the timing of this change.
- The retiree selects an individual plan and pays the premiums with after-tax dollars and then submits the receipts for reimbursement to the HRA.