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September 6, 2006

Tax-Favored Medical Accounts - Pay the Right Party

In Revenue Ruling 2006-36, the IRS clarified that the only way medical expenses can be reimbursed on a tax-favored basis from a medical reimbursement account is if the expenses to be reimbursed are those of the employee, or his/her spouse or dependent(s). 

According to this guidance, this is true even if the reimbursement is made after the employee’s death. Said another way, if any distribution is paid from a medical reimbursement plan to an individual other than the employee, a spouse or a dependent, the distribution would be akin to a cash-out, and would cause the plan to lose its tax-favored status, not only for the distribution to the ineligible person, but for all distributions made from the plan. 

It is very important that plans, such as health reimbursement plans, be reviewed to make certain that no distributions will be made other than to eligible individuals, even upon the employee’s death.

 

The information contained in this Benefit Beat is not intended to be legal, accounting, or other professional advice, nor are these comments directed to specific situations.

 

As required by U.S. Treasury rules, we inform you that, unless expressly stated otherwise, any U.S. federal tax advice contained in this Benefit Beat is not intended or written to be used, and cannot be used, by any person for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service.

 

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