QUESTION: Next year, our company will set up an HRA and a health FSA covering the same employees. In what order should reimbursements be paid from these two plans?
ANSWER: Unless you design your plan differently, the general ordering rule is that expenses are paid first from the HRA, until the HRA balance is exhausted, and then from the health FSA. However, this general rule makes it more likely that unused health FSA funds will be forfeited, especially in health FSAs that do not allow carryovers. (A health FSA carryover provision does not entirely eliminate the heightened risk of forfeiture because carryovers generally must be limited to no more than $500, adjusted for inflation, although plans may waive the limit for plan years ending in 2020 or 2021 (see our Checkpoint article).) Consequently, your company may wish to consider other plan designs, such as the following:
- HRA Pays Last. The HRA and health FSA plan documents could provide that the HRA pays last, after the health FSA has been exhausted. This design is often chosen by employers offering HRAs and health FSAs that cover the same employees for the same medical care expenses, because it reduces health FSA forfeitures. Nonetheless, some employers may prefer the general rule (HRA pays first), either because it increases health FSA forfeitures (which can be used to pay health FSA administrative expenses or offset losses under the health FSA uniform coverage rule), or because it lessens the build-up of large HRA carryovers (although employers can also cap or prohibit carryovers to reduce this financial exposure).
- Plans Cover Different Expenses. The plans could be designed to cover different expenses. For example, the health FSA could reimburse only vision or dental expenses, and the HRA could reimburse only deductibles and copayments not covered by the employer’s medical plan.
While some employers might like to design their health FSAs and HRAs to allow participants to choose (on an expense-by-expense basis) whether to submit a claim to the health FSA or the HRA, this approach has not been addressed in IRS guidance. Employers wishing to explore this approach should consult with legal counsel. In addition, employers with health FSAs that provide for a grace period may want to specifically address which plan pays first for expenses incurred during the grace period.
For more information, see EBIA’s Consumer-Driven Health Care manual at Section XXI.F.9 (“What Is the Ordering Rule for Reimbursements When There Is an HRA and a Health FSA?”); see also EBIA’s Cafeteria Plans manual at Section XX.I (“Expense Cannot Be Reimbursed (and Participant Must Certify That Reimbursement Will Not Be Sought) From Other Health Plan Coverage”).
Contributing Editors: EBIA Staff.