An HRA is a tax-exempt fund established by an employer for an employee that can be funded only by employer contributions, and not through a Section 125 cafeteria plan. The contributions made by the employer tax deductible and not subject to FICA or FUTA taxes. Employee reimbursements paid from this fund are also tax deductible from the employees gross income.
Internal Revenue Service Notice 2002-45 governs Health Reimbursement Accounts (HRAs). It defines an HRA as "an arrangement that:
- is paid by the employer and is not dependent upon a salary reduction
- is used to reimburse the employee and the employee's spouse and dependents for medical care expenses.
- provides for medical reimbursement payments up to the maximum amount for the coverage period and unused portions can be carried forward to increase the subsequent years maximum amount.
The advantage of an HRA to an employee is that since an employee has no election between excludable benefits and cash, it is not a cafeteria plan. Accordingly, it is not subject to the use-it-or-lost-it requirements of Code Section 125. However, it is less flexible than a cafeteria plan since health care benefits are the only excludable benefits that an HRA can provide.
Learn more about flexible benefit plans by clicking on the link or call Innovative Employee Benefits at 704-341-5981.
