NU Online News Service, June 27, 1:45 p.m. – The federal government has given a boost to organizers of defined-contribution health plans.

The federal Internal Revenue Service moved Wednesday to clarify the tax status of “health reimbursement arrangements.”

Employers who sponsor defined-contribution health programs often set up and fund the arrangements to give employees control over some cash that they can use to pay ordinary medical expenses.

The employer usually provides high-deductible indemnity insurance to protect the employees against catastrophic medical expenses.

The IRS guidance, which includes a notice and a revenue ruling, provides that medical benefits paid by properly designed Health Reimbursement Arrangements are not taxable.

In most cases, HRAs will not be subject to the complicated requirements that govern Flexible Spending Accounts, the IRS adds.

The IRS says an HRA can avoid federal taxation if the arrangement is funded solely by the employer and not by salary reduction, and the plan provides benefits only for “substantiated medical expenses.”

If the HRA provides for payments or other benefits irrespective of medical expenses, all amounts paid by the plan become taxable, including prior medical reimbursements, the IRS warns.

But the IRS says that HRAs can allow the carryover of unused amounts to later years.

That provision should eliminate concerns about the “use it or lose it rules” that apply to FSAs, the IRS says.

HRAs can also reimburse employees for the purchase of health insurance, and they can allow former employees, including retirees, continued access to unused reimbursements.

The IRS notes that HRAs are group health plans subject to federal COBRA benefits continuation requirements.

Dr. Dave Sanders, chief executive of MyHealthBank Inc., Portland, Ore., a defined-contribution health plan company, put out a statement welcoming the IRS guidance.

“With this clear guidance from the government, insurers should feel confident to embrace the pillars of self-direction,” Sanders says in the statement.

The IRS has posted more information about the HRA guidance on the Web, at http://www.ustreas.gov/press/releases/po3204.htm