Gerald Kramer
The AZ CPA
4531 N 16th St
Suite 126
Phoenix, AZ 85016
(602) 264-9331
Fax: (602) 279-1766
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Health Reimbursement Arrangements (HRAs) Clarified by the IRS
The internal Revenue Service issued guidance earlier this year regarding health reimbursement arrangements (HRAs). According to Treasury Secretary Paul O'Neill, "With this new guidance, we clear the way for employers to adopt health plans with patient-directed features so that employees have more choice and greater control over their health care coverage."
HRAs are entirely employer-funded and cannot be funded by salary reduction. These employer contributions are tax-deductible to the employer and tax-free to the employees. They are also exempt from the complicated rules that govern flexible spending accounts (FSAs).
HRAs may only reimburse the employee for substantiated medical care expenses, as defined by Internal Revenue Code §213(d), incurred by the employee and the employee's spouse and dependents as defined by §152. If the plan provides payments or other benefits irrespective of medical expenses, all amounts provided under the HRA become taxable, including any previous medical reimbursements.
Reimbursements by HRAs may be made up to a maximum dollar amount for a defined coverage period. However, a major difference from an FSA plan allows the carryover of unused portions from one tax year to another, increasing the maximum reimbursement amount in the subsequent period.
HRAs may be used to purchase health insurance. They are also considered to be group health plans subject to COBRA continuation requirements. Former employees, including retirees, may have continued access to their unused HRA reimbursements.
The guidance further explains that employer-provided coverage and medical care expense reimbursements made under HRA plan allowing unused amounts to be carried forward are excludable from gross income. In addition, it explains that expenses may be reimbursed by an FSA funded by employee salary reductions before an HRA is used. Both an HRA and a §125 health FSA cannot reimburse a medical expense.
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