QUESTION: Our company is thinking about adding an HRA that would be integrated with our major medical plan. Employees could carry over their HRA balances from year to year. What happens to those balances when an employee’s employment terminates?
ANSWER: Your company has some choices about what will happen to HRA balances remaining at termination of employment. The HRA may be designed so that employees forfeit their unused HRA balances when employment ends (typically after a limited post-termination opportunity to submit reimbursements for pre-termination expenses). Or your company may choose a design that permits employees to “spend down” their HRA balances and receive reimbursement for eligible expenses incurred after employment termination until the HRA balance is depleted. Alternatively, the HRA could be designed so that all but a nondiscriminatory class of employees forfeit unused amounts at termination. Regardless of which design you choose, terminated employees may not be “cashed out” of their HRAs (i.e., provided with cash or other benefits in an amount equal to some or all of the HRA balance), because a cash-out feature would trigger taxation of all HRA distributions, whether or not they were used to pay qualified medical expenses. The design choices you make should be clearly stated in the HRA plan document and explained to employees in the summary plan description and other communication materials.
Whether or not the balance is forfeited, COBRA must be offered unless an exception applies (e.g., because the HRA is sponsored by a small employer that is exempt from COBRA). If COBRA coverage is purchased, the recipient will have access to the HRA balance (notwithstanding any forfeiture rule), increased by any account credits that would be received for the coverage period by a similarly situated non-COBRA beneficiary. Note that COBRA’s application to HRAs raises some complex issues that are beyond the scope of this answer.
If an employee dies while eligible to incur reimbursable expenses, the HRA may allow the employee’s accumulated balance to reimburse the substantiated qualified medical expenses of the employee’s surviving spouse, children who are under age 27 as of the end of the taxable year, or tax dependents for health coverage purposes. A deceased employee’s balance may not be used to reimburse the medical expenses of anyone other than those individuals (there is a limited exception for certain state governmental HRAs), or paid for any reason other than medical expense reimbursement. For more information, see EBIA’s Consumer-Driven Health Care manual at Sections XXI.F.12 (“Forfeit Account Balances or Permit Spend-Downs?”), XXII.C.2 (“Treatment of HRAs Upon a Participant’s Death”), XXIV.F (“No Cash-Out of Unused Amounts”), and XXV.B (“HRAs and COBRA”). See also EBIA’s COBRA manual at Sections IV.C (“Small Employer Exception”) and XI.G (“How COBRA Applies to HRAs: Unique COBRA Administration Issues”).
Contributing Editors: EBIA Staff.
