HRA IRS Guidance

On June 26, 2002 the IRS issued a Notice and a Revenue Ruling on the tax treatment of Health Reimbursement Arrangements (HRAs). Newly named by the IRS, the HRA can be offered by an employer as a stand-alone arrangement or as part of a consumer-driven health plan or defined contribution health plan.In a consumer-driven health plan, an HRA is typically offered in conjunction with a high-deductible medical plan, along with a web-based information program. The IRS has taken a liberal view of these arrangements, holding that the cafeteria plan rules (section 125 of the Internal Revenue Code) do not apply to HRAs.

Before this guidance, employers had been tentative about offering such arrangements, uncertain of IRS approval. Some employers, applying the basic principles of sections 105 and 106 of the IRC, offered HRA-type arrangements as retiree medical plans. However, a 1989 proposed IRS regulation relating to cafeteria plans discouraged some employers from expanding these arrangements to active employees. The proposed regulation stated that the principles set out in the cafeteria plan regulations for health Flexible Spending Arrangements (FSAs) apply whether or not the arrangement is part of a cafeteria plan - which could mean considering an HRA to be a health FSA. It was unclear whether the "use it or lose it," the 12-month period of coverage or other health FSA rules would apply to an HRA. This new guidance clarifies that such principles do not apply to an HRA and opens up a realm of possibilities for employers.

The following IRS webpage discusses the guidance.