Blogging Employee Benefits

August 15, 2006

Tax Implications of HRA Reimbursement to Designated Beneficiary

Filed under: Healthcare — Fuguerre @ 12:24 am

Amounts paid to an employee under a [health] reimbursement plan are not excludable from gross income under §105(b) if the plan permits amounts to be paid as §213(d) medical benefits to a designated beneficiary (other than the employee’s spouse or dependents of the employee). None of the payments made from the reimbursement plan during the plan year to any person, including amounts paid to reimburse the medical expenses of an employee or the employee’s spouse or dependents, is excludable from the gross income [of the employee].

Rev. Rul. 2006-36

An IRS holding that frankly I didn’t find all that unexpected, given the setting of the law and regs and Notice 2002-45, which are analyzed and discussed in this latest ruling.

What surprised me was the leniency of the effective date. Sure, any new provision on or after August 15, 2006, is immediately exposed. But for a health reimbursement arrangement with a non-complying provision in place on or before August 14, 2006, the adverse tax implications won’t apply until plan years beginning on or after January 1, 2009.

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1 Comment »

  1. This ruling is aimed primarily at HRAs established by state governments or their political subdivisions and funded through governmental trusts or VEBAs (the 419A rules do not apply to these arrangements). Long story here, but most of these arrangements permitted taxable reimbursement of medical benefits to nondependent beneficiaries if participants died without spouses or dependents. This is because the HRAs are funded through accumulated severance or sick pay at the time of retirement, and often constitute tens of thousands of dollars for individual participants. The “funded” HRAs are typically established through collective bargaining agreements, and the idea of forfeiting benefits when a participant outlives his or her spouse is unacceptable.

    The ruling does not specifically address what happens when the value of HRA coverage is imputed to the HRA participant. Years of private letter rulings permit such coverage to be offered to nondependent domestic partners. Rev. Rul. 2006-36 is based on a fact pattern where the value of coverage is NOT imputed to the empoyee, and benefits are taxable to the recipient. Does this mean the PLRs governing nondependent domestic partners are preserved? Why else would the IRS carve out the fact pattern in this matter.

    If HRAs may no longer cover nondependent domestic partners, this may create a problem for the many Fortune 500 firms that have adopted these plans and made them available on the same terms as other health benefits. If HRAs MAY cover nondependent domestic partners, may they provide coverage to other individuals such as adult children, so long as the value of coverage is imputed? Rev. Rul. 2006-36 fails to advise.

    Comment by Mark — August 21, 2006 @ 5:49 pm


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