Health Reimbursement Arrangements

[Ron Snyder]

IRS has finally issued Notice 2002-45 and Revenue Ruling 2002-41 that discuss the tax laws and regulations as applied to a “health reimburse-ment arrangement” (or “HRA”). In a nutshell, those rulings permit HRAs to be excluded from employees’ income under certain limited circumstances: (1) The HRA may be used to reimburse only IRC section 213(d) medical expenses; (2) No other related benefits may be provided directly or indi-rectly (such as paying a sev-erance bonus to the employee where the amount is related to the unused HRA); (3) Amounts in the HRA must be exhausted prior to amounts in an flexible spending account (or “FSA”) under an IRC sec-tion 125 plan; (4) Long-term care benefits may not be provided if the HRA is an FSA; (5) The arrangement may not permit employees to use salary reductions directly or in-directly to fund the HRA.

A copy of the Notice is found at http://www.benefitslink.com/IRS/notice2002-45.pdf

[Guest ethompson]

Can you set a maximum accrual amount .. e.g., contributions will carry over until account balance reaches $3500, then no contributions will be made until reimbursement is requested and the account balance falls below $3500?

[Ron Snyder]

Yes, a limit may be imposed. It is a matter of the employer's design and discretion, and will be included in the plan document. IRS answered this question (and many others) for the ECFC recently.

[Guest Chiclaw]

I'm confused as to how HRAs work with COBRA. One of our clients wants to establish an HRA and fund $X on behalf of each employee. The employee can then request to be reimbursed for his own health insurance premiums or medical expenses. When the employee terminates employment I understand that he can continue to be reimbursed for expenses up to the remaining limit. However, he is also entitled to COBRA.

How does this work? Presumably, the employee will be forced to pay the "premium" in order to have the reimbursement available. This makes no sense to me. Am I missing something?

Thanks.

[Ron Snyder]

IRS has not yet clarified how HRAs will work for former employees under COBRA. However, it seems likely that, at worst, the participant will pay the premiums/medical expenses and submit reimbursement from the HRA. If the participant has elected COBRA with respect to the HRA (and I can't think of any reason to do so unless, under the employer's implementation of the plan, the participant forfeits his HRA balance unless he continues under COBRA), presumably he/she will pay the HRA monthly contribution at 102% and then be reimbursed at 100%, thus shrinking a small amount each month.

[Guest Chiclaw]

Thanks.