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Medical Reimbursement Health Insurance Plans

Medical reimbursement plans are governed by Section 105 of the IRS Code. These plans are sometimes referred to as Health Reimbursement Arrangements or HRA's. Reimbursement plans for medical expenses offer benefits to both employers and employees. Receiving reimbursement for medical expenses under the plan means real savings for families. This guide will help you understand how to use those medical reimbursement plans to your best advantage.

Medical Reimbursement Plans: How They Work

An employee who signs up for a medical reimbursement plan is reimbursed by his or her employer for eligible out-of-pocket medical expenses. Since the Plan is considered a tax-free benefit to employees, these expenses are paid with "before tax dollars," as opposed to "after tax dollars." A medical reimbursement plan can be offered on its own or as part of a cafeteria plan.

Most medical reimbursement plans are self-funded plans. This means that the employer decides to pay the cost of medical benefits, as opposed to paying premiums to an insurance company. The medical reimbursement plan can be offered in addition to a group health insurance plan, if desired.

In order for a medical reimbursement plan to meet the rules set out by the IRS, it must be meet two tests:

Benefits Test For Medical Reimbursement Plans

Any benefit plan being offered to highly compensated employees (as well as their dependents) must also be offered to all employees and their dependents. The maximum benefit must be the same to all employees and their dependents, no matter how old the employee is or how long he or she has been working for the company.

Eligibility Test for Medical Reimbursement Plans

To be eligible, the medical reimbursement plan must meet two of these requirements:

  1. The medical benefits plan must include a minimum of 70% of eligible employees.

  2. A minimum of 70% of employees must be eligible to participate in the plan, and at least 80% of employees who are eligible actually sign up for the plan.

  3. The opportunity to participate in the plan must be available to a cross-section of employees; it can't discriminate in favor of highly compensated employees.

Medical Reimbursement Plans: Advantages for Employers

An employer has the flexibility to determine what the eligibility requirements will be for their medical reimbursement plan. In addition, the employer can set a cap on the amount they will pay in benefits under the plan each year. The money paid out to employees under the plan can be deducted by the employer for tax purposes.

Medical Reimbursement Plans: Advantages for Employees

Employees will appreciate the fact that any money they receive as reimbursement for medical expenses is not subject to income tax if the employee has not taken a deduction for medical expenses when filing their income tax return.

Medical Reimbursement Plans: Administration

While an employer can choose to administer their own medical reimbursement plan, it is not generally recommended. Determining whether an expense is eligible under the plan is not always clear; it requires extensive knowledge of the IRS Code. An employer would be wise not to want to run the risk of having compliance issues if they make an error when paying claims.

The other reason why it makes more sense to have an outside party take charge of administering the medical reimbursement plan is that if the employer chooses not to reimburse an employee for a medical expense, it may cause hard feelings between them. This awkwardness can be avoided if the plan is being handled at arms' length.

Medical Reimbursement Plans: Use Of Credit Or Debit Cards

An employer can use a credit card or a debit card to pay for medical benefits. The card can only be used to pay for allowable medical expenses. The employee cannot ask for reimbursement from any other insurance plan.

All benefits paid for under the plan must be documented, and a policy must be established to recover any payments made in error. The dollar amount on the card can never be more than the maximum amount of benefits provided under the plan. Since there are many conditions that need to be met, be sure to check with the IRS before implementing this method.

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