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Paying for my own health-care plan

Dear Tax Talk,
Since the health-care coverage that my employer provides went up over 38 percent this year, I have decided to carry my own health insurance, which is cheaper than that which my employer can provide. Since I am still employed, can I write off payments I make for my own health care? What if my employer reimburses me for these payments to my own individual policy? -- Cindy

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Dear Cindy,
What makes sense economically sometimes pays off taxwise. I've seen some clients' younger employees forgo the employer plan in favor of a lesser-cost individual policy. While these premiums would be deductible by you as unreimbursed medical expenses subject to reduction by 7.5 percent of your adjusted gross income, it's more tax advantageous if they're just not counted as income to you.

Until recently, there wasn't much guidance from the Internal Revenue Service on how to treat these payments. However, since health-care costs have become such a hot topic, the IRS has started putting pen to paper and coming up with some great acronyms. We now have MSAs, or medical savings accounts; FSAs, or flexible spending accounts; and HRAs, or health reimbursement arrangements, that help pay for your HDHPs, or high-deductible health plans, and other medical expenses. The best acronym that will help you is an employer-provided health reimbursement arrangement.

Simply put, an HRA is an agreement by your employer to reimburse you for qualified medical expenses. Pursuant to IRS Notice 2002-45:

Reimbursements for insurance covering medical-care expenses as defined in §213(d)(1)(D) are allowable reimbursements under an HRA, including amounts paid for premiums for accident or health coverage for current employees, retirees and COBRA-qualified beneficiaries.

An HRA is an arrangement by the employer and does not have to be as formal as some other benefit plans. However, there are some important rules that an employer must follow regarding discrimination and qualified reimbursements so that the arrangement is respected by the IRS.'s corrections policy
-- Posted: July 27, 2005
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