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July 28, 2005 at 08:00 PM
Federal officials are stopping efforts to put tax-exempt medical reimbursement accounts in 401(a) profit-sharing plans.[@@]
Employers can put MRAs in 401(a) plans, but those employers must apply the same distribution rules to MRA distributions and other types of 401(a) distributions, and employees must include the MRA distributions in their taxable gross income, Robert Walsh, an official at the Internal Revenue Service, writes in IRS Revenue Ruling 2005-55.
Section 401(a) of the Internal Revenue Code lets employers cut employees’ current income tax bills by putting income in special personal accounts and helping the employees defer payment of income taxes to a later date.
The 401(a) plan participants normally must pay income taxes on any plan distributions that they receive.
Employers that have set up 401(a) MRA programs also relied on Internal Revenue Code Section 105. Section 105 lets employees exclude direct reimbursement for medical expenses from taxable income.
Other IRS rules let employees use up to 25% of 401(a) account funds to pay for life insurance, accident insurance and health insurance, Walsh writes.
But employers that try to put a tax-exempt MRA inside a 401(a) plan, by limiting use of the MRA funds to paying medical bills, are violating a law that gives 401(a) plan participants an unconditional right to collect the MRA funds, Walsh writes.
