HRAs for Former Employees

The Service recently ruled on the excludibility of contributions and on coverage under a health care reimbursement arrangement (HRA) for former employees and their families.

The Plan

An employer (E) established an employer-provided medical reimbursement plan (P). P provides for the payment or reimbursement of qualified medical expenses incurred by its members.  All E employees who are either administrators or teachers are members. Under P, payment or reimbursement is limited to expenses incurred after retirement or other termination of employment.

E makes contributions to P on behalf of each member; there is no salary reduction or employee election. The balance of the members individual account determines the total payments or reimbursements to which he or she is entitled. Members do not have the right to receive cash or any other taxable or nontaxable benefit under P, other than payment or reimbursement of medical expenses (1) as defined in Sec. 213(d) (except long-term care expenses), (2) incurred by the member and his or her spouse and dependents (as defined in Sec. 152) and (3) only to the extent not reimbursed from any other plan. E requires members to substantiate medical expenses.

On the death of a member who has an account balance, the surviving spouse and dependents are entitled to payment or reimbursement of medical expenses until the account is exhausted. If a deceased member does not have a surviving spouse or dependents, the account balance is allocated among the other member accounts.

Law

Sec. 106 provides that an employees gross income does not include employer-provided coverage under an accident or health plan. The employer may contribute to such a plan either by paying the premium or by contributing to a separate trust or fund that provides accident or health benefits directly or through insurance to one or more employees. Under Sec. 105(b), gross income does not include payments, directly or indirectly, to the taxpayer to reimburse expenses for medical care (as defined in Sec. 213(d)).

In Rev. Rul. 2002-41, an employer sponsored an HRA paid for solely by the employer, not through salary-reduction contributions. In Situation 2, the maximum reimbursement under the HRA not applied to reimburse medical care expenses before an employee retires or otherwise terminates employment continues to be available after retirement or termination for any Sec. 213(d) medical care expense of the former employee and his or her spouse and dependents. The ruling concludes that coverage and reimbursements made under the HRA are excludible from participating employees gross income under Secs. 106 and 105.

Similarly, Notice 2002-45 provides that medical care expense reimbursements under an HRA are excludible under Sec. 105(b) if they are provided to current and former employees (including retired employees), their spouses and dependents and those of deceased employees.

Conclusion

Es P meets the requirements in Rev. Rul. 2002-41 and Notice 2002-45. Thus, contributions and coverage under P are excludible from a members gross income under Sec. 106; the payments and reimbursements of medical care expenses for members and their spouses and dependents are excludible from gross income.

IRS Letter Ruling 200452013 (12/24/04)

Reflections: Under the above rulings, a plan could provide for payment or reimbursement of any medical care expenses, as defined in Sec. 213(d), other than long-term care insurance premiums. Thus, for example, a current or former employee could use his or her account balances to pay for his or her familys health insurance premiums, nonprescription medicines and drugs (see Rev. Rul. 2003-102, in the context of flexible spending accounts) and retirement community fees (see Delbert L. Baker, 122 TC 143 (2004); for a discussion, see Pflanz, Tax Clinic, Deductibility of Retirement Community Fees, TTA, December 2004), in addition to other medical care expenses.