Health Reimbursement Account Information

With the increasing cost of providing health insurance benefits to employees, many employers are considering other options. Some companies implement wellness programs to keep employees healthy and reduce costs. Others offer health insurance plans with higher deductibles. Many employers are combining health reimbursement accounts for employees who choose high-deductible insurance plans. A health reimbursement account allows employees to submit medical expenses to their plan administrator and receive reimbursement for the expense.

Who Funds It

• Health reimbursement accounts receive funding from the employer. The employee contributes nothing to these plans. Employers can contribute any amount they wish to each employee's health reimbursement account. Other health insurance options exist for employees who wish to contribute to their own health savings, such as flexible spending accounts. Employees may contribute to a flexible spending account even if they receive coverage under a health reimbursement account.

Tax Benefits

• Money contributed to a health reimbursement account increases the employee's income as she uses the funds. However, she pays no federal income taxes, state income taxes or FICA taxes on this money.

Distributions

• Health reimbursement account distributions need to be used for qualified medical expenses. Qualified medical expenses include non-prescription drugs, health insurance premiums, long-term care coverage premiums and medical or dental expenses not covered under the employee's insurance plan. Any money reimbursed through the plan cannot be itemized on the taxpayer's schedule A of her tax return. Expenses incurred before the employee enrolls in the health reimbursement account are excluded from coverage.

Remaining Balance

• An employee can carry the balance remaining in his health reimbursement account at the end of each year forward to the next year as long as he remains enrolled in the account. If the employee leaves the company or changes his enrollment options to exclude the health reimbursement account, he forfeits the remaining balance. The employer cannot refund the balance, according to IRS guidelines.

Qualified Persons

• Distributions made from health reimbursement accounts can only be used for qualified persons. Qualified persons include the employee, her spouse and her dependents. Any current or former employee who incurred medical expenses while enrolled in the health reimbursement account also qualifies. A person who qualified as a dependent on the employee's tax return, except for three criteria, qualify for coverage under the health reimbursement account. These criteria include the dependent filing a joint return, reporting gross income of at least $3,650 or the employee qualifies as a dependent on another taxpayer's return. Adult children of the employee under age 27 also qualify, as of March 2010.