In most cases, routine payments to employees under a health reimbursement account are not taxed by the IRS.

Most but not all. Examples of HRA designs that don’t qualify for tax breaks:

• plans that cover only health care, but reimburse employees all or a portion of their unused money at  the end of the year
• plans that provide a death benefit  to employees’ dependents from unused funds, if the money isn’t limited to reimbursing their medical expenses, and
• plans that permit unused account dollars to count as “credit” toward other company benefits (example: a 401(k) contribution).

These rules don’t apply to flexible spending accounts (FSAs) in Section 125 cafeteria plans, as long as unused flex account money is not applied from one plan year to the next.

Beware non-medical payments

With an HRA, an employer can’t reimburse employees for any of their non-medical expenses.  If you do, even payments for otherwise eligible medical expenses become taxable as deferred compensation.

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