HRA Reimbursement for Expense Subsequently Paid

[Chaz]

(Facts changed and simplified.)

Employee participates in a self-insured health plan with an HRA feature.

Employee receives medical services from out-of-network provider and is balance billed $1,000 for the cost of services that exceeded what plan paid.

Employee submits claim for $1,000 to HRA and receives reimbursement.  

Before employee pays balance bill, plan reevaluates the claim and pays the provider the $1,000, thus the employee now owes $0 to the provider.  The employee did not initiate or participate in the reevaluation.

What is the consequence of these events?  Can the employer seek to have the employee return the $1,000?  If the employee does not or the employer does not wish the employee to do so, does the $1,000 become taxable to the employee?  If it does become taxable compensation is it the obligation of the employer to treat it as W-2 compensation or is it up to the employee to address?

Anyone come across this situation?

[Gary Kushner]

Yes, in a similar variant. The common theme was that the net effect was that the participant had zero unreimbursed expenses, yet had received an HRA reimbursement (it wouldn't matter if it was an FSA either).

The proper procedure is to have the employer attempt to recoup the now-overpayment from the participant. Failing that, the $1,000 in your example would be W-2 income subject to all regular payroll taxation (FICA, Medicare, FUTA, and possibly SUTA), and should be addressed via payroll processing and tax reporting.

[Chaz]

Thanks!  That's what I concluded, too.

[Belgarath]

And if the employee refuses to return the money, the employee should not count on a long and profitable employment...