Plan Reimbursements to Designated Beneficiaries Not Excludable from Gross Income

August 14, 2006 ( - Amounts paid to an employee under a reimbursement plan are not excludable from
gross income if the plan permits amounts to be paid as medical benefits to a designated beneficiary (other than the employee's spouse or dependents of the employee), according to a recent IRS ruling.

The ruling   said that none of the payments made from the reimbursement plan during the plan year to any person, including amounts paid to reimburse the medical expenses of an employee or the employee’s spouse or dependents, is excludable from the gross income.

The IRS considered an employer who sponsors a reimbursement plan that reimburses an employee solely for substantiated medical care expenses (as defined in Section 213(d) ). The plan provides reimbursements up to an annual maximum dollar amount for the coverage period and reimburses medical expenses only to the extent that the expenses have not been reimbursed from any other plan.

Under the plan, each employee’s unused reimbursement amount available at the end of each plan year is rolled over for use in other plan years.  

The plan reimburses the substantiated medical care expenses of both current and former employees (including retired employees), their spouses and dependents. The plan also reimburses the substantiated medical care expenses of the surviving spouse and dependents of a deceased employee. If any of those parties die, the reimbursement money goes to the beneficiary named by the employee. The beneficiary doesn’t get the fair market value of the reimbursement, but instead it is taxable.

This ruling applies to reimbursement plans that hold a provision on or before August 14, 2006 which says that upon the death of a deceased employee’s surviving spouse and last dependent, or upon the death of the employee, if there is no surviving spouse or dependents, any unused reimbursement amount will be paid as a reimbursement of substantiated medical care expenses of a beneficiary designated by the employee. The ruling is effective for plans years that begin after December 31, 2008.