J.K. Lasser's Small Business Taxes 2013: Your Complete Guide to a Better Bottom Line

Health Reimbursement Arrangements

If you want to limit your outlays for employee medical costs, consider a relatively new option called a health reimbursement arrangement (HRA). You contribute a fixed amount to an account for each employee that can be tapped to cover unreimbursed medical expenses. You can (but are not required to) complement the HRA by switching medical insurance to a less extensive, less costly plan. Overall you save on your medical costs. And the HRA does not entail any costly and complex design requirements associated with other types of plans such as flexible spending arrangements within cafeteria plans (for details on HRAs see Rev. Rul. 2002-41). It is essentially a bookkeeping entry on the part of the business (no separate funding is required).

The benefit to your employee is that neither contributions to nor qualified reimbursements from the plan are taxable. Qualified disbursements include prescription drugs and insulin as well as doctor-prescribed over-the-counter medications. Funds in the account can be accessed by credit or debit cards that you set up for this purpose. Also, unused amounts in an employee’s account can be carried forward and used in future years (there is no use-it-or-lose-it feature). However, when an employee leaves, any balance remaining in the HRA is not portable; it is forfeited.