|Clergy Tax Facts - Health Reimbursement Arrangement (HRA)|
Health Reimbursement Plan for Churches
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A medical reimbursement plan is any plan or arrangement under which an employer (church) reimburses an employee for uninsured health or accident expenses incurred by the employee or their dependents. Health or accident expenses are defined in IRC Section 213(e). If done correctly, these reimbursements are paid to the employee tax-free.
Note: An medical reimbursement plan is NOT a Section 125 plan, Cafeteria Plan, or Flexible Spending Plan. Difference include the fact that these plans are more complicated to administer, they are employee funded through salary reduction, and they are characterized as a use-it-or-lose-it type of plan.
A church can use a medical reimbursement plan as a way to lower medical insurance costs but still cover the employees qualified medical expenses tax free. In a year when the cumulative medical costs for employees is relatively low, the savings on insurance costs can be quite significant. On the other hand, in a year of high medical costs, medical reimbursements could be higher than insurance premiums saved. If a church reduces medical insurance coverage in order to lower premiums without adding a medical reimbursment plan, that church is simply shifting medical expenses from employer to employee. In addition, the employee could then be forced to pay their higher medical expense using after-tax funds. The type of plan helps avoid that added cost to the employee.
The employer (church) must establish a formal written plan. (See plan document link.) Note that this benefit is for employees only and is employer funded. It cannot be funded by any means of salary reduction.
The employer determines the amount available in each employee’s personal account for the coverage period (generally a year). The employer can establish a dollar limit per employee. The employer also determines how much of that amount can be rolled over to future coverage periods.
As eligible expenses are submitted, the employee's personal account is reduced and paid to them on a nontaxable basis.
- Expenses must be submitted using adequate claim substantiation.
- The expenses claimed cannot be reimbursed by any other plan.
- Only qualified expenses may be reimbursed (IRC Section 213)
- Claims must be only for those expenses incurred during the coverage period.
- Reimbursement for payments of medical insurance premiums may be included.
Unused funds at the end of the year are carried over to the next year. At the beginning of the next coverage period, additional funds are added. This leaves funds from a low medical cost period available for use in a higher cost period. With no “use-it-or-lose-it” requirements, employees have an incentive to be responsible managers of the balances.
The plan must not discriminate in favor of highly compensated employees with respect to eligibility to
participate or benefits provided under the plan.
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Clergy should not view this information as a substitute for professional advice. This information is subject to change, due to administrative rulings or interpretations and or technical corrections by the IRS. If legal advice or other expert assistance is required, the services of a competent clergy tax professional person should be sought.