Is Health Reimbursement Arrangement taxed?

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Dear Tax Talk,
If a company pays the health insurance premiums for the employees, I know that is not taxable to the employee and the company gets the expense. What I want to know is that if the company agrees to pay part of the deductible to employees after they reach a certain amount (example: deductible is $2,500 and after they reach $1,500, the employer reimburses them up to the $1,000), is that taxable to the employees? Employees turn in their Explanation of Benefits (EOB) the employer, proving it is paid for health purposes.
— Peggy

Dear Peggy,
You have a very business-savvy employer. Many employers are switching to high-deductible health insurance plans to lower the cost of the premiums that are being paid. In order to help employees deal with the high deductible amount each year, employers can establish a Health Reimbursement Arrangement, or HRA, that is solely funded by the employer to reimburse employees for qualified medical expenses up to a maximum dollar amount for a coverage period.

Here are the benefits of an HRA:

  • Contributions made by your employer are not included in your gross income.
  • Reimbursements may be tax-free if you pay qualified medical expenses.
  • Any unused amounts in the HRA can be carried forward to reimbursements in later years.
  • Employers have complete flexibility in this area and therefore when designing their plan can offer various benefits.

Reimbursements under an HRA can be made to the following persons except in certain situations as outlined in IRS Publication 969:

  • Current and former employees.
  • Spouses and dependents of those employees.
  • Your child under the age of 27 at the end of the tax year.
  • Spouses and dependents of deceased employees.

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