Your next health plan? Guidelines issued for tax-free health reimbursement accounts.

• Author: Canada, Mark P.
• Position: Employee Benefits

Businesses are once again looking for ways to fight the annual battle against rising health-care costs. Because of the significant cost increases, more are open to a shift from traditional approaches. Historically, businesses have sponsored health plans where employees pay a set amount of the costs, and the employer pays the balance. In recent years, some have established "defined-contribution" health plans, where the employer pays the set amount, and the employees pay the balance. The hope is that by requiring employees to pay for more of the costs, they will become health-care "shoppers" and not just consumers.

The IRS, responding to questions concerning these newly emerging plans, recently issued guidelines to help employers desiring to adopt a defined-contribution plan. The guidelines create parameters for health reimbursement account plans, or "HRAs." If an employer's plan qualifies as an HRA, the benefits paid to or for employees will be nontaxable. If a plan does not qualify, employees will be taxed on the benefits paid.

Under an HRA, an employer credits a set dollar amount to a health reimbursement account for eligible employees. Amounts in the account are then used to reimburse employees for medical expenses the employee or the employee's dependents incur. Employers are considering increasing the deductibles and co-payments under their traditional group health plan and using the HRA reimburse employees for all or some of the increase.

Unlike flexible spending accounts under "cafeteria" or "Section 125" plans, amounts not used in one year may (and possibly must) be carried forward to the next year. The "use or lose it" rule does not apply to an HRA. This is the feature proponents hope will encourage employees to become better consumers. Knowing that amounts in their accounts won't be forfeited, employees can wait to use the employer's dollars for needed expenses in the next year rather than frivolous expenses in the current year...