IRS Ruling May Change Structure of Employer Health Plans

Gardner, Randy; Welch, Julie
February 2003
Journal of Financial Planning;Feb2003, Vol. 16 Issue 2, p38
Academic Journal
The article examines the effect on financial planning of the U.S. Internal Revenue Service decision to allow employer-funded health care reimbursement arrangements (HRA) that allow unused funds to be carried forward rather than lost. One of the drawbacks of medical expense reimbursement accounts and flexible spending arrangements offered through salary reduction is that employees must use or lose the funds they set aside. An employer may fund an HRA on a pay-as-you-go basis, through a trust or using insurance. The contributed amounts are excluded from the employee's income and are deductible by the employer. Amounts distributed to pay for medical expenses also are excluded from the employee's income. HRA reimburse employees or former employees for medical expenses incurred by the employee, the employee's spouse or any of the employee's dependents. They are funded entirely by employer contributions. Unlike a cafeteria plan, there is no salary reduction or cash option election. They provide reimbursements up to a stated maximum dollar amount for a specified coverage period and require that any unused portion of the account be carried forward to increase the account in one or more subsequent periods.


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