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New rule for Health Reimbursement Accounts

     A recent IRS ruling on Health Reimbursement Accounts should spark a change in the healthcare system towards more patient-directed health care. HRAs are tax-free health care reimbursement accounts established and funded by employers. In this ruling (Revenue Ruling 2002-41), the IRS indicated that unused money in these accounts can carry over from year to year. In other words, HRA's are unlike Flexible Savings Account where the employee loses the account balance at the end of the year. Not only can the account can be used to pay out-of-pocket expenses, but it can also be used to purchase individual health insurance. An added benefit is that former employees and retirees can continue to draw on the account.

     The HRA account is generally structured in a three-tiered manner. An employer would contribute a certain amount to the first tier. After that money is used up, the employee would pay the second-tier of expenses up to a pre-determined maximum. Expenses above that would be picked up by the employer.