A health reimbursement arrangement (HRA) must be funded solely by an employer. The contribution cannot be paid through a voluntary salary reduction agreement on the part of an employee. Employees are reimbursed tax free for qualified medical expenses up to a maximum dollar amount for a coverage period. An HRA may be offered with other health plans, including FSAs.

For information on the interaction between an HRA and an HSA, see Other employee health plans under Qualifying for an HSA, earlier.

What are the benefits of an HRA? You may enjoy several benefits from having an HRA.

· Contributions made by your employer can be excluded from your gross income.

· Reimbursements may be tax free if you pay qualified medical expenses. See Qualified medical expenses, later.

· Any unused amounts in the HRA can be carried forward for reimbursements in later years.

Qualifying for an HRA

HRAs are employer-established benefit plans. These may be offered in conjunction with other employer-provided health benefits. Employers have complete flexibility to offer various combinations of benefits in designing their plan. You do not have to be covered under any other health care plan to participate.

Self-employed persons are not eligible for an HRA.

Certain limitations may apply if you are a highly compensated participant.

Contributions to an HRA

HRAs are funded solely through employer contributions and may not be funded through employee salary deferrals under a cafeteria plan. These contributions are not included in the employee's income. You do not pay federal income taxes or employment taxes on amounts your employer contributes to the HRA.

Amount of Contribution

There is no limit on the amount of money your employer can contribute to the accounts. Additionally, the maximum reimbursement amount credited under the HRA in the future may be increased or decreased by amounts not previously used. See Balance in an HRA, later.

Distributions From an HRA

Distributions from an HRA must be paid to reimburse you for qualified medical expenses you have incurred. The expense must have been incurred on or after the date you are enrolled in the HRA.

Debit cards, credit cards, and stored value cards given to you by your employer can be used to reimburse participants in an HRA. If the use of these cards meets certain substantiation methods, you may not have to provide additional information to the HRA. For information on these methods, see Revenue Ruling 2003-43 on page 935 of Internal Revenue Bulletin (IRB) 2003-21 at
www.irs.gov/pub/irs-irbs/irb03-21.pdf, Notice 2006-69 on page 107 of IRB 2006-31 at
http://www.irs.gov/pub/irs-irbs/irb06-31.pdf, and Notice 2007-2 on page 254 of IRB 2007-2 at
http://www.irs.gov/pub/irs-irbs/irb07-02.pdf.

If any distribution is, or can be, made for other than the reimbursement of qualified medical expenses, any distribution (including reimbursement of qualified medical expenses) made in the current tax year is included in gross income. For example, if an unused reimbursement is payable to you in cash at the end of the year, or upon termination of your employment, any distribution from the HRA is included in your income. This also applies if any unused amount upon your death is payable in cash to your beneficiary or estate, or if the HRA provides an option for you to transfer any unused reimbursement at the end of the year to a retirement plan.

If the plan permits amounts to be paid as medical benefits to a designated beneficiary (other than the employee's spouse or dependents), any distribution from the HRA is included in income. However, if, before August 15, 2006, the plan contains such a provision, this rule will not apply until plan years beginning after December 31, 2008.

Reimbursements under an HRA can be made to the following persons.

1. Current and former employees.

2. Spouses and dependents of those employees.

3. Any person you could have claimed as a dependent on your return except that:

a. The person filed a joint return,

b. The person had gross income of $3,300 or more, or

c. You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2006 return.

4. Spouses and dependents of deceased employees.

Qualified medical expenses. Qualified medical expenses are those specified in the plan that would generally qualify for the medical and dental expenses deduction. These are explained in Publication 502, Medical and Dental Expenses. Examples include amounts paid for doctors' fees, prescription and non-prescription medicines, and necessary hospital services not paid for by insurance.

Qualified medical expenses from your HRA include the following.

· Amounts paid for health insurance premiums.

· Amounts paid for long-term care coverage.

· Amounts that are not covered under another health plan.

If you are covered under both an HRA and a health FSA, see Notice 2002-45, Part V, which is on page 93 of Internal Revenue Bulletin 2002-28 at
www.irs.gov/pub/irs-irbs/irb02-28.pdf.

Caution : You cannot deduct qualified medical expenses as an itemized deduction on Schedule A (Form 1040) that are equal to the distribution from the HRA.

Balance in an HRA

Amounts that remain at the end of the year can generally be carried over to the next year. Your employer is not permitted to refund any part of the balance to you. These amounts may never be used for anything but reimbursements for qualified medical expenses.

Employer Participation

For an HRA to maintain tax-qualified status, employers must comply with certain requirements that apply to other accident and health plans. Chapters 1 and 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits, explain these requirements.

This document has been prepared solely for the purpose of providing information based on legal and tax advice provided to Zane Benefits, Inc. However, it is not meant to provide legal or tax advice for entities other than Zane Benefits. No representation is made as to the completeness or accuracy of the information herein. As such, it should not be used as a substitute for consultation with professional employment law specialists, tax accountants, attorneys, or other advisors. To comply with U.S. Treasury Regulations, we inform you that, unless expressly stated otherwise, any tax information contained in this communication is not intended to be used and cannot be used by any taxpayer to avoid penalties under the Internal Revenue Code.