HRA vs. Medical Expense Reimbursement Account under Section 105

[Guest RedShoes]

We currently offer a Medical Expense Reimbursement Plan for ee's who "opt out" of our health insurance plan, as well as a Medical Expense Reimbursement Plan for retirees. The plan docs for these two plans state that they are intended to meet the requirements for qualification under Section 105 of the Internal Revenue Code.

These plans were established long before I came to my position here and I haven't been able to track down much history as to how or who provided guidance on their establishment...

Here's are my questions:

Is a Medical Expense Reimbursement Plan under Section 105 the same thing as a Health Reimbursement Arrangement (HRA) under section 105?

Secondly, if yes. The plans I have are currently set up as "use-it or lose-it" plans. I recently read that under a HRA it IS permissable for the plan to carry over un-used funds to the next year. Is this a requirement of the internal revenue code? I'm trying to determine if I need to amend my plans as such.

[oriecat]

How are the plans funded? Employee money or employer money? I believe HRA's have to be 100% employER money. If it's employEE money, then it sounds like a section 125 plan, at least for the current ee's. I don't know anything about retiree benefits tho.

[Guest RedShoes]

They are both employER funded. They do not fall under our section 125 plan.

[GBurns]

Traditional Section 105 MERPs should not have a "use it or lose it" feature even if only because there is no need to pre-fund it, there are also no need for individual employee accounts that have balances to be lost.

An HRA is a section 105 MERP with additional restrictions, benefits and conditions.

[g8r]

What you're getting into are different types of self-funded health plans under 105(h). Essentially, there is much flexiblity in designing them and what you call it doesn't really mean much.

If you have an individual account reimbursement plan (each individual has a max amount that can be reimbursed), then the plan could be designed so that unused amounts are lost at the end of each period of coverage or it could be designed so that amounts are carried over (this is the HRA). Ultimately, the plan can be designed any way the employer wants.

[Guest gnappi]

How would this benefit be taxed to the individual participant .. W-2 or 1099-misc.

thanks.

[GBurns]

As long as the plan is compliant, amounts that are reimbursed for eligible medical expenses are not included in the gross income of the employee and therefore is neither on a W-2 nor a 1099.

[Harwood]

If the plan favors Highly Compensated Individuals, all or part of the reimbursements to HCIs is subject to Federal Income Tax Withholding.

See IRS Publication 15-B and IRC 105(h)