Originating in the tax code Section 105 of 1954, the
HRA has seen many revisions, additions, and related
published codes over the years.
The Starting Point:
The original “Section
105” plan or product guidelines are based on
Sections 105, 106, 162, and Revenue Ruling 71-588
of the Internal
Revenue Code. These sections left much of these
codes open to interpretation by those that were
implementing services around them. In these original
codes, it was outlined that a Section 105 plan would
consist of two different benefit amounts; one that
would dictate health insurance premium limits and
one that would dictate out-of-pocket expense limits.
Because each code section is relatively vague,
Section 105 administrators began to “administer”
plan offerings in different ways.
Further Definition:
1999 began the refining of the “Section 105”
product. In 1999, two sets of
Coordinated Issue
Papers were published to further understand what is
allowed in a Section 105 plan. First, are expenses
deductible that are reimbursed to a spousal
employee? Second, are the reimbursements excluded
from gross pay? This document formally established
that a spousal employee could be reimbursed for
family medical expenses as non-reportable income.
The second set of Coordinated Issue Papers addressed
retroactivity. This version stated that expenses
incurred prior to adoption of a plan (both premiums
and non-premiums) are not allowed as non-reportable
income to the spouse/employee.
The Turning Point:
Notice 2002-45 gave the Section 105 plan a formal
name and guidelines to expand the HRA. With more
flexibility defined, the HRA became
an option for business
owners to offer their employees. Notice
2002-45 was the first federal documentation
outlining parameters for handling HRAs. This ground-breaking
document put into effect what we recognize today as
an HRA. An HRA of today can and should include all
of the following:
One Benefit Amount. This amount could be used
towards health insurance premiums, out-of-pocket
costs in any fashion, and over-the-counter expenses
so long as the combined amounts of these expenses do
not exceed the plan maximum.
Carry Forward.
An HRA plan provides
reimbursements up to the maximum dollar limit that
is established within the individual plan. Any
unused portion of the benefit maximum at the end of
the coverage period can be carried forward into the
next plan year.
Carry Over.
An HRA plan allows employees to
be reimbursed for a set amount of eligible medical
expenses. If an employee exceeds this limit, the
difference between the limit of the plan and the
actual amount spent can be carried over to the
following plan year. The benefit amount of the
following year would be automatically reduced by the
amount carried over.
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