Employers and their benefits advisors may have to give up on some efforts to make certain kinds of personal health accounts a better deal for employees.[@@]

An Internal Revenue Service official says employers and employees can exclude contributions to health reimbursement arrangements only if HRA programs adhere strictly to requirements that HRA funds be used only to reimburse employees, dependents and retirees for eligible, substantiated medical expenses.

The HRA program, authorized by Section 105 of the Internal Revenue Code, lets employers, and only employers, contribute to programs that reimburse employees, dependents and retirees for medical expenses. Employers and employees can exclude HRA contributions and reimbursement payments from taxable income. Unlike users of the new health savings account programs, who must buy health insurance policies with high deductibles, HRA program users can combine HRAs with no-deductible or low-deductible health coverage.

HRA programs that that give unused HRA funds to beneficiaries of employees who die, pay unused HRA funds to departing employees, or let employees shift unused HRA funds into retirement plans “do not meet the requirements for tax-favored treatment,” Barbara Pie, an IRS tax-exempt entities specialists, writes in IRS Revenue Ruling 2005-24.

At the ineligible plans, “no amount paid under the plans to any person is excludable from gross income under Section 105(b),” Pie writes.

The ruling applies to HRA programs for retirees as well as HRA programs that include active employees, Pie adds.

The IRS has posted the ruling on the Web at http://www.irs.gov/pub/irs-drop/rr-05-24.pdf