HRAs and Retirees

Retirees and Health Reimbursement Arrangements

IRS guidance issued in 2002 clarified uncertainties about offering HRAs to retirees. Now, it appears that HRAs are a viable way to:

Allow retirees to accrue and spend-down carryovers over several years, and
Pay for retirees' out-of-pocket medical expenses (including insurance premiums).

While the employer can elect to have retirees to participate in HRAs offered to employees, an unlinked (or stand-alone) HRA may be created just for retirees to reimburse all or certain eligible Code § 213 medical expenses of the retirees.

The employer can fund the Retiree HRA in a variety of ways.

The employer can fund each retiree's HRA with the same amount at the time of retirement (such as a lump sum of $20,000) or
The employer can choose to fund each retiree's HRA at the time of retirement with an amount based on the employee's length of service (such as $1,000 per year).
The employer can also decide to accrue a certain amount per year (such as $1,000) for the above HRAs.

Must a Retirement HRA be vested?

No. The Retirement HRA does not need to be vested. The reimbursements can come out of the Employer's general funds. And, if so stated in the Plan Documents, the HRA can be amended or terminated at any time.

Can unused funds from an HRA set up for active employees go into a Retiree HRA?

Yes. The plan design can be set up to say that all or a portion of unused funds will be put in a Retiree HRA. Employees will only be able to access these funds if they meet the eligibility requirements set forth in the Retiree HRA Plan Documents.

Are Retiree HRAs exempt from HIPAA?

Possibly, since a Retiree HRA would be a plan covering fewer than two "current employees". (See ERISA § 732(a).) In a meeting of the ABA Joint Committee on Employee Benefits (May 8, 2002), informal comments from DOL representatives indicated that HIPAA requirements "do not apply to a retiree-only plan, with one exception." That exception will be ERISA § 711 regarding benefits for mothers and newborns.

Since these remarks are informal, it may be wise to comply with all HIPAA requirements until specific clarification is made regarding HIPAA and Retiree HRAs.