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Why every employer should read IRS Notice 2002-45 (HRAs)

HRA • March 12, 2013 at 5:11 PM • Written by: Christina Merhar

This blog article hasn't been updated since 2018. It may contain outdated information.

What is the original idea behind health reimbursement arrangements (HRAs)? It's actually very simple. This is why every employer, health insurance agent, and financial planner should read IRS Notice 2002-45.

The notice was written in 2002 and provides rules and guidance for health reimbursement arrangements (HRAs). The notice is divided into eight parts:

Part I: Tax treatment of health reimbursement arrangements 

Part one of the notice provides a simple, straightforward explanation of HRAs. In summary, an HRA is an arrangement that:

  1. Is paid for solely by the employer and not provided pursuant to salary reduction election or otherwise under a Section 125 cafeteria plan.

  2. Reimburses the employee for medical care expenses (as defined by Section 213(d) of the Internal Revenue Code and listed in IRS Publication 502) incurred by the employee and the employee’s spouse and dependents.

  3. Provides reimbursements up to a maximum dollar amount for a coverage period and any unused portion of the maximum dollar amount at the end of a coverage period is carried forward to increase the maximum reimbursement amount in subsequent coverage periods.

Reimbursements are generally excludable from the employee's gross income under Internal Revenue Code Sections 106 and 105.

And, assuming that the maximum amount of reimbursement which is reasonably available to a participant under an HRA is not substantially in excess of the value of coverage under the HRA, an HRA is a flexible spending arrangement (FSA) as defined in § 106(c)(2). If an HRA is an FSA, reimbursable medical care expenses may not include expenses for qualified long-term care services as defined in Section 7702B(c).

Part 2:  Benefits under a health reimbursement arrangement

This section outlines rules for reimbursement under an HRA. In summary:

  • An HRA may only reimburse for medical care as defined in IRC Section 213(d).

  • Each medical care expense must be substantiated.

  • An HRA may only reimburse employees during their effective dates in the HRA plan.

  • An HRA can reimburse for eligible health insurance premium amounts, as defined in IRC Section 213(d)(1)(D).

Part 3: Coverage under a health reimbursement arrangement

This section outlines coverage and eligibility under an HRA. In summary:

  • An HRA can be made available to current and former employees (including retirees), their spouses and qualified dependents, and the spouses and dependents of deceased employees.

  • An HRA may continue to reimburse former or retired employees after termination or retirement, even if the employee does not elect COBRA.

Parts 4 - 8: Health reimbursement arrangements and cafeteria plans, ordering, nondiscrimination and COBRA

The last four sections outline further details about HRAs and cafeteria plans, ordering with an FSA, nondiscrimination, and COBRA. In summary:

  • Employer contributions to an HRA may not be attributable to salary reduction (as in a cafeteria plan).

  • HRA and FSA Ordering: In no case may an employee be reimbursed for the same medical expense by both an HRA and an FSA. If coverage is provided under both an HRA and an FSA for the same medical care expenses, amounts available under an HRA must be exhausted before reimbursements may be made from the FSA. However, the HRA plan documents can include a provision to outline alternative ordering rules.

  • Nondiscrimination: The same Section 105 nondiscrimination rules for self-insured medical expense reimbursement plans apply.

  • COBRA: HRAs are subject to COBRA requirements (for employers with over 20 employees), meaning employers must allow employees and/or dependents to continue their HRA coverage after termination if they pay the cost themselves. 


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Christina Merhar