HRA's

[Guest Jeff Mitchell]

Obviously this is new ground since the legislation was just passed in june. But, comments would be welcome.

I have a client that give employees, as part of their retirment package 50% of the value of their accumulated sick days in cash. The question is could this cash be rolled into an HRA account to escape the taxation as long as the funds would be used for those items designated in HRA.

[papogi]

Based on the regs, my thinking on this is that an employer could do this, but they would have to do it for everyone who is retiring. For instance, if they give the retiree a choice between the taxable payout of sick time and money going into an HRA, you create a situation where the HRA is being funded indirectly through salary reduction. As long as the retiree is not given that choice, then there is no salary reduction. Retirees must be required to take the HRA.

[Guest Kathleen Meagher]

There is a problem with contributing the cash value (or a percentage of the cash value) of sick leave to an HRA because of the discrimination rules of Code section 105(h). HCEs by definition have higher pay than non-HCEs, so it's likely that HCEs would get higher sick leave contributions. As an unfunded medical reimbursement plan under section 105, an HRA can't provide higher benefits for HCEs.

The sick leave contribution would work for payment of retiree medical premiums because the discrimination rules don't apply.