Mid-Atlantic Health Law TOPICS

Over the last several years, "defined contribution health plans" have surfaced as a means
of attempting to control the cost of employee health benefits. One form of these plans
involves the establishment of an employer funded "account" for each employee, from
which the employee may be reimbursed for medical expenses, with any unused amount
being carried over to the next year.
Many benefits professionals hesitated to advocate the use of these plans because of the
concern that the Internal Revenue Service (IRS) would prohibit the carry over feature.
(Such a carry over feature is expressly prohibited in health care flexible spending
accounts.) However, in June of 2002, the IRS issued guidance explicitly permitting this
feature.
In its guidance, the IRS refers to these plans as Health Reimbursement Arrangements
(HRAs). Reimbursements from HRAs are tax free to the employee, and the funding is
deductible to the employer.
In general:
1. An HRA may only be funded by an employer and may not be used by self-employed
individuals;
2. An HRA may only reimburse substantiated medical expenses, or health insurance
premiums, up to the amount that has been contributed to the HRA;
3. Only expenses not previously deducted for tax purposes that have been incurred by
employees, former employees or their dependents, after the HRA goes into effect, may be
reimbursed by an HRA;
4. An HRA must specify a maximum dollar amount, and unused amounts may be carried
over to another plan year; and
5. Unused HRA amounts may not be, directly or indirectly, cashed out to participants.