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Merritt Personal Lines Manual: 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:
  4. The person filed a joint return,
  5. The person had gross income of $3,300 or more, or
  6. You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2006 return.
  7. 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.

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

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