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The IRS recently issued the first guidance authorizing the favorable tax treatment of employer-sponsored health reimbursement arrangements (HRAs). In some ways, HRAs are similar to health flexible spending accounts (FSAs). They are not, however, subject to all the same rules as FSAs, including the "use it or lose it" rule. The IRS guidance came in the form of Rev. Rul. 2002-41, 2002-28 I.R.B. 75, and Notice 2002-45, 2002-28 I.R.B. 93.
An HRA is defined as an arrangement that is funded solely by the employer and not through salary reduction. An HRA is used to reimburse an employee for medical expenses up to a maximum dollar limit. However, unlike FSAs, unused amounts may be carried forward to subsequent coverage periods. Medical expenses eligible for reimbursement under an HRA are those expenses defined in sec 213. As with FSAs, these expenses must be substantiated by the employee and cannot be taken as a deduction by the employee if they receive reimbursement from...