IRS Explains HRA Tax Status

April 5, 2005 ( - Employees in an employer-provided Health Reimbursement Arrangement (HRA) where the employer reimburses workers for certain medical expenses don't have to count the reimbursement as income.

That was a conclusion of  additional guidance about HRAs from the Internal Revenue Service (IRS) released Tuesday.

According to the IRS, the HRA scenario deemed to be eligible for favorable tax treatment provides for payments that are for substantiated health expenses by current and former workers and their spouses and dependents. Also at the death of the deceased worker’s spouse and last dependent (or the death of the employee who has no dependents), any unused funds in the account are forfeited.

Employees in such a plan have no right to get cash or any other benefit other than the reimbursement of substantiated medical expenses.

Meanwhile, if an HRA provides for a cash payment to the worker of any unused reimbursement amount, the worker would have to report those funds as compensation for tax purposes, the IRS said. Also, according to the tax agency, in plans that pay regardless of whether medical expenses have been incurred, all amounts have to be included in a worker’s gross income.

The IRS document lays out several HRA scenarios in the document and discusses the tax status of each.