NU Online News Service, July 2, 2:15 p.m. – Hewitt Associates L.L.C., Lincolnshire, Ill., a benefits consulting firm, says the new Internal Revenue Service guidelines for defined-contribution health plans should encourage more employers to try the defined-contribution approach.

Employers who sponsor defined-contribution health programs usually provide high-deductible indemnity insurance to protect the employees against catastrophic medical expenses, then set up and fund “personal care accounts” to give employees control over some cash that they can use to pay ordinary medical expenses.

The new IRS guidelines state that employers can fund “health care reimbursement arrangements,” or personal care accounts, and let the unused balances stay in the HRAs from one year to the next without either the employers or the employees paying income taxes on the HRA contributions or the HRA assets.

To avoid creating federal income tax headaches, an employer must fund the accounts entirely with its own money.

But the accounts can be used for health insurance premiums, including COBRA premiums, as well as reimbursement for out-of-pocket medical expenses, Hewitt says.

“This ruling is important as it gives health plans a green light to create innovative designs and provides consumers with the opportunity to select lower cost coverage during a time when significant contribution increases are expected for traditional managed care options,” Tom Beauregard, a Hewitt health care consultant, says in a statement about the new IRS guidelines.

“The next big step in this area will be around the portability of these accounts,” Beauregard says. “If this is ultimately allowed these options will become much more popular with employees as account balances can be transferred between employers and we’ll move closer to a defined contribution health care model.”

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