SABC Newsletter

  Southern Administrators and Benefit Consultants, Inc.

August, 2002

The Treasury Department and IRS have released a Revenue Ruling and Notice offering much-needed guidance regarding the tax treatment of "health reimbursement arrangements" (HRAs), which are in the family of defined contribution health plans. These plans, not to be confused with "Unreimbursed Medical" through your Cafeteria plan, are funded solely by the employer (and not by salary reductions) and can permit carryovers of unused amounts from year to year and are not subject to the use-it-or-lose-it rules and many other rules that apply to Unreimbursed Medical under the Cafeteria Plan.

Employers  looking for ways to cut the cost of health care are finding that by raising their deductibles and giving employees predetermined funds for medical expenses through a HRA can cut their current costs. These arrangements can only reimburse substantiated medical expenses and may reimburse employees for the purchase of health insurance. Employers with both a HRA and Unreimbursed Medical may specify that coverage under the HRA is available only after expenses exceeding the dollar amount of the Unreimbursed Medical have been paid. (end result: the Unreimbursed Medical pays first and the HRA pays second).

HRAs may provide for continued access to unused HRA amounts by former or  retired employees for post employment medical expenses, even if they do not elect COBRA,. but cash-outs are not permitted. (These arrangement are subject to COBRA's continuation requirements). An HRA may also provide that the maximum reimbursement amount available after retirement or other termination is reduced for any administrative costs of continuing such coverage.

These arrangement have been attracting quite a bit of attention, but their use has been limited, due to the uncertainty about their proper tax treatment.

This   Revenue Ruling provides employers with guidance on many previously open issues and include several examples. However, as with any new program, there will be many questions that will arise that the IRS will need to address. This guidance offers a great starting point for those employers that are interested. If you would like more information regarding HRAs or a copy of the Revenue Ruling, please contact us. We will continue to update you as more information is  received.

IRS Comments on Certain   Medical Expenses

IRS officials Donna Crisalli and John Sapienza participated in a recent  ECFC's teleconference on Medical Expenses, their comments while informal and non-binding, offer insight as to how to approach certain medical expenses.

Obesity - As we recentily reported in previous newsletters, the IRS has ruled that obesity is now considered an illness, and with the diagnosis of obesity that certain expenses can be reimbursed through a participants Unreimbursed Medical spending account. Officials stress that first the doctor must give the participant a letter stating they have been diagnosed with obesity.  With that diagnosis, medical expenses and program fees can be covered. Food and health club dues cannot. 

Fertility Treatments - Treatments can be reimburse that are directly for the plan participant or egg donor.  Thus, expenses for a surrogate would not qualify. Donor expenses are treated similarly to those of an organ donor.

Birth Control - Pregnancy kits and ovulation monitors are considered diagnostic supplies and are acceptable expenses.  Condoms and spermicides are not a prescription drug, yet affect the function of the body and thus are permissible expenses.