Revenue Ruling Addresses PS Plans With Medical Reimbursement Accounts

July 27, 2005 ( - A new IRS Revenue Ruling says a Profit Sharing Plan violates vesting requirements and possibly other Internal Revenue Code sections if it imposes conditions on the use of amounts held in participant's accounts.

Specifically, IRS RR 2005-55, considers the case of a Profit Sharing Plan which applies 25% of the employer’s contribution to medical reimbursement accounts for each participant.   The plan only allows distribution for reimbursement of medical care expenses to the participant, even after termination, or the participant’s beneficiary after the participant’s death.   If the participant dies and there is no beneficiary established, the account is forfeited and used to reduce future employer contributions to the reimbursement account.

In its ruling the IRS refers to code section 411 that imposes minimum vesting requirements on a qualified plan and establishes a participant’s right to an accrued non-forfeitable benefit.

The ruling established that a plan with these provisions will not be disqualified if it received a favorable determination letter prior to August 15, 2005 and the employer amends the plan for plan years beginning after August 15 to provide that amounts in each participant’s medical reimbursement account are distributable to the participant on the same conditions as amounts in other accounts.   The ruling further provides that amounts distributed to reimburse medical expenses prior to the effective date of the plan’s amendment will still be excluded from the participant’s taxable income.

The ruling can be found  here .