HRA Beneficiary Issue in Brief

On August 14, 2006 the IRS issued Revenue Ruling 2006-36 to clarify the beneficiary status of Health Reimbursement Arrangements (HRA). The Revenue Ruling indicates that HRA reimbursements, whether taxable or not, may no longer be made to non-spouse or non-dependent beneficiaries. Plans have until December 31, 2008 to comply with the ruling; there are no consequences for reimbursements to such beneficiaries prior to that date. Under the new rule, which will be fully implemented on January 1, 2009, reimbursements may not be made from an HRA to a non-dependent beneficiary. A number of employers who adopted Retirement Health Savings (RHS) programs with the understanding that non-dependent beneficiaries were permitted are concerned about this restriction.

Status of Legislation

Rep. James McDermott (D-WA) introduced the Tax Equity for Health Plan Beneficiaries Act (H.R. 1820) on March 29, 2007. Senators Gordon Smith (R-OR), Joe Lieberman (ID-CT) and Maria Cantwell (D-WA) introduced the companion bill, the Tax Equity for Domestic Partner and Health Plan Beneficiaries Act of 2007 (S. 1556) on June 6, 2007.

The primary focus of both bills is to provide tax parity to non-spouse/non-dependent individuals who qualify for and receive employer-provided health plan benefits. (Currently employees must pay tax on the value of employer health benefits provided to non-dependent family members.) The bill also permits a Voluntary Employees Beneficiary Association (VEBA) to provide full health benefits to a non-spouse, non-dependent beneficiary without endangering its tax-exempt status.

Another provision important to ICMA-RC directs the Treasury to issue rules to allow employees to elect to have their HRAs reimburse the uninsured medical expenses of a non-spouse, non-dependent designated beneficiary. Because it would override current Treasury rules preventing reimbursements to non-spouse, non-dependent beneficiaries, the HRA provision would correct the beneficiary problem that exists for RHS programs.

Outlook

Both bills are in the first phase of the legislative process and must garner bi-partisan co-sponsors. Then a larger bill that could be used as a "vehicle" for this measure - and one that contains another provision that would pay for the cost of the bill -- would have to be identified. Finally, the bill would require enough support to gain passage and be signed into law.

This will be very difficult to accomplish in the current political environment. However, we are encouraged by the fact that the bills have wide-ranging bi-partisan and private sector support and that the fairness and equity issues in the bill could be attractive issues for Members of Congress. This could enhance the bill's chance of making it through the legislative process.