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Would “interest crediting” help boost participation in your organization’s HRA?

Health Reimbursement Arrangements (HRAs) are a tax-advantaged way for employers to reimburse employees for out-of-pocket medical expenses. These plans have become quite popular, partly because they come in a variety of forms that can best suit the needs of the sponsoring organization.

However, employees often need to be “sold” on the pros of an HRA. One way you may be able to boost interest and participation in one of these plans is to offer it as not only a health care benefit, but also an investment vehicle.

Interest-earning accounts

HRAs are employer-owned plans. Therefore, you can decide whether to allow participants to roll over unused reimbursement allowances from year to year. If you do, participants can amass sizable balances over time — and there’s a way for them to earn interest on those balances.

When an HRA is “unfunded,” reimbursements are paid out of the employer’s general assets. From an accounting perspective, HRA credits represent bookkeeping entries rather than actual, separate assets.

Because no separate assets are involved, HRA balances under an unfunded plan won’t earn interest in the way that, for example, savings accounts do. If an employer wishes, however, it can periodically credit additional amounts to participants’ respective bookkeeping accounts in an amount equivalent to the interest that they would have earned if their HRA balances had been held in a typical interest-bearing investment. This is called “interest crediting.”

Like other amounts offered under an HRA, these “notional” credits are nontaxable and can be used only to reimburse qualifying medical expenses. In addition, they’re subject to the Internal Revenue Code’s rules prohibiting discrimination in favor of highly compensated employees.

The trust option

As mentioned, long-term participants may accumulate substantial HRA balances if annual carryovers are allowed. This situation has led some employers to fund their HRAs through a trust — for example, by using a Voluntary Employees’ Beneficiary Association plan. Such funding might be particularly attractive if HRA carryovers represent a substantial liability on the employer’s balance sheet.

When an HRA is funded this way, the employer deposits funds equal to the HRA credits into the trust to be held in an interest-bearing account, with interest allocated to participants’ HRA accounts based on their respective balances.

Be aware, however, that funded HRAs are subject to additional requirements. Trust assets must be invested prudently under ERISA’s fiduciary standards. Also, earnings that aren’t credited to participants’ accounts can be used only to defray plan administration expenses or to provide benefits to participants. In addition, forfeitures attributed to terminated employees have to remain in the trust. (Additional rules and reporting requirements may apply.)

If you decide to fund your HRA with a trust, you’ll need to carefully consider how to communicate this benefit to participants — including the ability to amend or discontinue interest crediting in the future.

Rewards, rules and risks

With the rise of online investment opportunities and cryptocurrency, the popularity of investing has exploded. Adding an interest-crediting feature to your HRA may capture the attention of employees and increase participation in — and appreciation of — this benefit. However, the rules are complex, and there are significant risks to consider. Contact us for further information.

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