Health Reimbursement Arrangements

Notice 2002-45 and Rev. Rul. 2002-41 expand accessibility of health reimbursement arrangements (HRAs) and provide guidance on their tax treatment. These HRAs allow employees to direct medical cost reimbursements, without subjecting the benefit payments to income taxation, if certain arrangements are met. In addition, HRAs are not subject to cumbersome, plan-design requirements, which apply to healthcare flexible spending arrangements funded through employee salary reductions.

An HRA must be funded solely from employer funds, no part of which can come from an employee salary-reduction agreement. Eligible expenses are medical expenses as defined in Sec. 213(d) and incurred by the employee and his or her spouse and dependents. The arrangement must provide for reimbursements up to a maximum dollar amount. If any portion is unused at the end of the year, that amount must be carried forward to the following year to increase the maximum dollar amount available. Amounts reimbursed under an HRA are excludible from income under Secs. 105 and 106, to the extent the HRA is an employer-provided accident or healthcare plan.

Expenses submitted for reimbursement must be substantiated. They cannot be for medical expenses incurred prior to the HRA’s existence nor attributable to expenses for which a deduction was allowed under Sec. 213 in a prior year.

Coverage may be provided for current and former (including retired) employees and their spouses and dependents and for deceased employee’s spouses and dependents. Self-employed persons (as defined in Sec. 401(c)) are not employees for HRA purposes.

To the extent an HRA is considered a self-insured medical reimbursement plan, Sec. 105 nondiscrimination rules apply. HRAs are also subject to Consolidated Omnibus Budget Reconciliation Act of 1985 continuation coverage rules.

HRAs may become more popular under the new guidance. They must comply with various statutory rules. Employers must consider all the requirements before implementing an HRA.

From John W. Lindbloom, CPA/PFS, Huber, Ring, Helm & Co., P.C., St. Louis, MO