IRS approves new design for Health Reimbursement Arrangement

by Tony Novak, MBA, MT, OnlineAdviser at Freedom Benefits, originally published 7/27/2003, last updated 11/29/2011

Small business employers generally love the features of the new Health Reimbursement Accounts (HRA) in providing flexible health benefits to employees. This plan reduces health insurance costs, wage taxes and administrative work for the business as compared to traditional small group health plans. But employers often find it difficult to provide health benefits fairly to all eligible employees with different levels of wages, job title, medical needs and number of dependents.

Some employers provide health benefits based on cost of insurance, job title or family status. Others use a “same dollar amount for all” approach. There has been little formal guidance from the IRS or Department of Labor on this subject, and small business owners generally defaulted to the provisions offered by their health insurance companies.

In a private letter ruling number 200329014 issued July 18, 2003 the IRS gave approval to a new system that takes into account both the employees wages and number of exemptions on the W4 (presumably indicative of the number of dependents).

Employees with high wages and large number of exemptions receive a greater employer contribution toward health care costs. This system is likely to be well received by key employees yet still viewed as a fair allocation to younger employees without a family. This new plan design will likely allow small business owners and key employees to receive significantly higher health benefits – other than health insurance – than the other employees in the business.

The new plan design approved by the IRS included benefits only for employees who voluntarily opted into a salary-deducted health insurance plan. While HRA plans do not require health insurance per se, the employee’s voluntary contribution to the insurance cost is a key provision of the overall health plan design that will provide for long term security, control costs and prevent the perception of abuse of plan benefits.

The new IRS publication can be found at http://www.irs.gov/pub/irs-wd/0329014.pdf and the key provisions of this ruling will be incorporated into the HRA Startup and Administration kit available at www.FreedomBenefits.org.

Tony Novak is a member of the Pennsylvania Institute of Certified Public Accountants, the New Jersey Society of Certified Public Accountants and an accredited member of the Better Business Bureau.

Ask about personal professional and affordable help with

reviewing tax returns with lingering questions
improving personal and small business accounting
tax planning strategies
managing health care expenses and insurance
special needs planning
revamping stalled retirement plans
providing benefits to employees
negotiating executive benefits

Find my business articles online at these Web sites:

Status: available for reprint

This article is available for republication in its entirety without charge after obtaining the express written permission of the author.

Please e-mail a request to the author that includes the name of the requestor (individual and corporate) and the intended destination of publication.