IRS: Tax-Favored Status
Lost Under HRA Cash Payouts
The Internal Revenue Service (IRS) released guidance that an employee would lose their
tax-favored status with a Health Reimbursement Arrangement (HRA) if the employer allowed
participants to take unused balances in cash.
On April 5, 2005, the IRS released Revenue
Ruling 2005-24, providing three HRA designs with a cash-out of unused balances. For
each example, the IRS rejected the designs as violating the Tax Code and earlier rules. Previously,
it had been determined that to remain tax-favored, HRA balances must be limited to
only reimbursement of medical care expenses.
The ruling clarifies vacation and/or sick leave time (e.g. amounts typically paid
as taxable compensation) accumulated by an employee or former employee can be transferred
under certain circumstances to a medical reimbursement plan as employer contributions
to provide additional tax-free medical benefits. In
addition, any unused funds are forfeited upon the death of the deceased employees
spouse and last dependent, or the death of the employee who has no dependents.
The Revenue Ruling is effective for plan years beginning on or after January 1, 2006.
HRAs are a major part of the growing
trend toward greater health care consumer responsibility. With HRA
Administration from Infinisource an HRA becomes
a timely, powerful resource that benefits the employer as well as the HRA
participants. HRAs can
be used in conjunction with a high deductible health plan to curb premium costs or
with a Flexible Spending Account to
help cover out-of-pocket expenses.
Employees find value in HRAs as it gives them the ability to offset some of the costs
passed on to employees because of increases in healthcare premiums throughout the
country. Employers will reap benefits from offering HRAs by using plans that may be
lower in cost than other healthcare plans. In addition, they can tout their benefits
in a better light, which can only assist in recruitment efforts for new employees.
When it comes to employee benefit administration,
the thing to remember is that Infinisource tailors a benefit plan design exclusively
for each client. Through individual consultations, well ensure each plan design fits
specific business needs. As a clients needs change, we adjust the plan design to fit.
Infinisource has built an HRA Resource Center as a free service to affiliated agents
and brokers. You can access this information on our website, www.benefitsolved.com,
using your agent/broker login. Please contact our sales team at 800-779-6384 or by
email solutions@infinisource.net,
for more information on accessing these resources.
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