January 24, 2006
Harry Beker Re-Confirms Death Benefit Provisions of HRAs
On January 19, 2006, Harry Beker, Chief IRS Counsel, visited Minneapolis for the Minnesota State Bar Association Employee Benefits Section 26th Annual Advanced Employee Benefits Workshop. He participated in a 90 minute presentation entitled HRAs/HSAs with Darcy Hitesman and Deb Shoemaker, Senior Assistant General Counsel (PreferredOne). In response to a question from the audience, Harry Beker re-confirmed it was not acceptable to have a designated beneficiary as a recipient of HRA funds, even if the distribution is for reimbursement of medical expenses and even if the amounts are taxable.
In referring to the original HRA guidance, he noted an HRA cannot provide a cash benefit; it can only reimburse for medical expenses of the account holder, the spouse of the account holder (within the meaning of the Defense of Marriage Act), and the dependent of the account holder (within the meaning of Section 152 as adjusted by the Working Families Tax Relief Act). He went on to confirm that this requirement precludes an account holder from designating a non-spouse, non-dependent individual as a designated beneficiary of the HRA proceeds. Providing these persons with benefits, even if taxable, is the equivalent of providing a cash benefit and, therefore, not allowed. He specifically acknowledged the existence of plans, particularly those of public entities (e.g., schools), that are not in compliance with the HRA requirements and indicated that providing these plans time to correct this problem was an underlying reason for the transitional relief made available under Rev. Ruling 2005-24. The transitional relief lasts until the end of the plan year that began on or before 12-31-05. Therefore, calendar year HRAs must comply with the rules beginning January 1, 2006. An HRA with a plan year beginning July 1 will have to be in compliance beginning July 1, 2006.
In response to a follow up question from the audience, Harry Beker also re-confirmed that it is the employer’s responsibility to assure that its plan is in compliance; it is not the HRA provider’s responsibility.
Observation: This is consistent with the way federal agencies generally operate, looking to the responsible party under the statute and then leaving it up to that entity to pursue any remedies (e.g., breach of contract, indemnification, negligence) it may have against third parties (e.g., service providers).
Mr. Beker also commented on the fundamental nature of account-based retiree health plans. He indicated that regardless of what they are called, in order to provide tax free benefits the plan must either be (1) a medical reimbursement account that is part of a cafeteria plan under Sections 105 and 125 of the Code, or (2) a health reimbursement arrangement under Sections 105 and 106 of the Code. Those two types of plans are the only account-based medical reimbursement plans that the IRS recognizes. He also affirmed that a private letter ruling that does not specifically identify a particular feature (i.e., distributions to non-spouse and non-dependent designated beneficiaries), then the ruling cannot be relied upon for a position that a plan with that feature meets the applicable requirements of the Code.
Recommendation: If a service provider indicates a particular feature of its plan is not a problem because the plan has a private letter ruling or determination letter, request a copy and confirm that the feature in question is identified in the ruling and the ruling specifically addresses the tax compliance with Sections 105 and 106 of the Code.
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