If you’re looking for a way to reduce employee benefit costs, you may wish to consider using a health reimbursement arrangement (HRA). An HRA is an employer-funded health benefit account for individual employees that may be used to pay their medical expenses and health insurance premiums. This type of plan is generally more economical and more flexible. Plus, it has more features than a traditional health benefit plan and, at the same time, provides favorable treatment for federal income tax purposes.
Under an HRA, the contributions you make and the amounts received by your employees are generally excluded from the employee’s income. In addition, any excess amounts at the end of the year can be carried over to future years without being lost.
In order to receive favorable tax treatment, an HRA must meet the following requirements:
• The plan is paid for only by you and is not provided by an employee salary reduction election or under an employee benefit cafeteria plan;
• The plan reimburses the covered person for medical care expenses of the person, the person’s spouse and the person’s dependents; and
• The plan reimburses a covered person up to a maximum dollar amount for any period of coverage, and any unused portion of the maximum dollar amount at the end of that period is carried forward to increase the maximum reimbursement amount in subsequent coverage periods.