The Internal Revenue Service has issued a ruling that allows employees to carry over, tax free, money provided by their employers for out-of-pocket health costs. Here’s what you should know about the new rule.
New Rollover Option For HRAs
The ruling covers money remaining in employees’ Health Reimbursement Arrangements (HRAs), which are employer-provided accident and health plans used to reimburse medical expenses.
HRAs differ from the more common Flexible Spending Accounts (FSAs), which allow employees to set aside a certain amount of their pretax earnings for various medical expenses. Flexible spending money that isn’t used up by the end of the year is forfeited. This tends to either discourage employees from participating or spurs them to make a bunch of end-of-the-year expenditures so the money isn’t wasted. HRAs, on the other hand, are funded entirely by employers—employees do not make a salary reduction election to pay for the HRA.
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The new HRA rollover provision encourages employees to choose their medical spending wisely because any leftover money can be used the following year.Note that the IRS rules don’t specify an effective date. But it appears that the new rollover provision applies to HRAs for 2003.
For More Information
For more information about the ruling (Revenue Ruling 2002-41), contact the IRS at (202) 622-6080.