Health Reimbursement Arrangements - State and Local Government Health Plans

On Dec. 18, 2015, Congress passed the Protecting Americans from Tax Hikes Act, part of which expands the existing use of Health Reimbursement Arrangements (HRAs) in the accident or health plans of a state or local retirement system.

HRA reimbursements under an employer’s accident or health plan for medical care expenses covering only an employee, their spouse, dependents and children who will be under age 27 at the end of the year are excluded from gross income. This treatment remains the same in the case of a deceased employee with a plan reimbursing the medical expenses of only the employee’s surviving spouse, dependents and children who will be under age 27 at the end of the year.

Unless a limited exception applies, if a plan reimburses the medical expenses of any other beneficiary, all expense reimbursements under the plan are included in income, including those of the employee and the employee’s spouse, dependents and children under age 27 (or the employee’s surviving spouse, dependents and children under age 27 in the case of a deceased employee.)

For the limited exception to apply, the plan must have provided, on or before January 1, 2008, for reimbursement of the medical expenses of a deceased employee’s beneficiary without regard to whether the beneficiary is the employee’s surviving spouse, dependent, or child under age 27. In addition, the plan must be funded by a medical trust (1) that is either established in connection with a public retirement system or established by or on behalf of a State or political subdivision thereof, and (2) that either has been authorized by a State legislature or has received a favorable ruling from the IRS that the trust’s income is not includible in gross income by reason of the exclusion for income of a State or political subdivision or the exemption from income tax for a voluntary employees’ beneficiary association (VEBA) described in Internal Revenue Code Section 501(c)(9).

This exception preserves the exclusion from gross income for reimbursements of medical expenses of the employee and the employee’s spouse, dependents and children under age 27 (or the employee’s surviving spouse, dependents and children under age 27 in the case of a deceased employee.) Reimbursements of medical expenses of other beneficiaries are included in income.