What Are the IRS Rules for a Retiree Reimbursement Account?
Navigate the IRS guidelines for your Retiree Reimbursement Account. Understand how this employer-funded benefit helps cover your medical costs tax-free.
A Retiree Reimbursement Account (RRA) is a benefit plan funded entirely by an employer to help former employees cover medical costs in retirement. It functions as a notional, or bookkeeping, account on the employer’s records rather than a traditional bank account owned by the retiree. This arrangement is for retirees and, in some cases, their eligible spouses or dependents who meet the plan’s criteria.
The funds are designated for health-related expenses. Unlike a 401(k) or a Health Savings Account (HSA), the retiree cannot contribute personal funds. The employer determines the structure and availability of these accounts, establishing the rules for eligibility and use within Internal Revenue Service (IRS) guidelines.
IRS Tax Treatment of Retiree Reimbursement Accounts
The tax rules for Retiree Reimbursement Accounts provide advantages for both the employer and the retiree. For the employer, contributions made to an RRA are tax-deductible as a business expense. This allows companies to offer a post-employment benefit while reducing their taxable income. The funds must be earmarked for employee healthcare for this tax treatment to apply.
For the retiree, the benefit is that reimbursements for qualified medical expenses are tax-free and do not count as taxable income. This tax-free status is governed by Sections 105 and 106 of the Internal Revenue Code for employer-provided health plans.
Funds that carry over from one year to the next do not generate taxable interest or earnings for the retiree, as there is no investment growth. If you receive a tax-free reimbursement from an RRA for a medical expense, you cannot also claim that expense as a deduction on your federal income tax return. This rule prevents a “double-dipping” of tax benefits.
Qualified Medical Expenses for Reimbursement
The IRS defines “qualified medical expenses” in Publication 502, which is the guide for what can be reimbursed tax-free. These are the same standards that apply to other health spending accounts and the medical expense deduction. While employers can design their RRA plans to be more restrictive, the expenses in Publication 502 represent the maximum allowable scope.
Insurance Premiums
A common use for RRA funds is paying for health insurance premiums, which is helpful for retirees transitioning to Medicare. Eligible premiums can include those for Medicare Part B (medical insurance) and Part D (prescription drug coverage). Funds may also be used for premiums for Medicare Advantage plans and private Medicare supplemental insurance, known as Medigap. Some plans also permit reimbursement for dental and vision insurance premiums.
Out-of-Pocket Costs
RRAs are also used to cover direct costs for medical care. This includes deductibles, the amount a person must pay for services before their insurance plan pays. Copayments, the fixed amount paid for a covered service, are also eligible. Coinsurance, the percentage of costs you pay after meeting your deductible, can also be reimbursed.
Medical Services
A wide array of medical, dental, and vision services are considered qualified expenses. These can include:
- Payments for dental care, such as cleanings, fillings, and crowns
- Vision care expenses like eye exams, prescription eyeglasses, and contact lenses
- The cost of prescription drugs
- Hearing aids and their batteries
- Medical equipment such as crutches
- Fees paid to doctors, surgeons, and other medical practitioners
Ineligible Expenses
Expenses not for the diagnosis, cure, treatment, or prevention of disease are ineligible. This excludes cosmetic surgery that is not medically necessary. General health items like non-prescription vitamins, gym memberships, or diet foods cannot be reimbursed unless prescribed by a doctor for a specific medical condition.
Key Operational Rules and Plan Design
The employer determines the amount credited to the account, which can be a fixed annual sum or an amount based on years of service. Before a retiree can receive a reimbursement, they must provide proof of a valid medical expense. This involves submitting documentation such as receipts, bills from providers, or an Explanation of Benefits (EOB). This process ensures funds are used only for qualified medical expenses as defined by the plan.
A feature of many RRAs is that unused funds may roll over from one year to the next. This allows retirees to accumulate a balance over time to cover more significant medical costs that may arise. However, this is not a universal rule, and some plans may have a “use-it-or-lose-it” provision or a limit on how much can be carried forward. Reviewing the plan’s specific rules is important.
The disposition of remaining funds upon the death of the retiree depends on the employer’s plan design. Some plans may extend the benefit to a surviving spouse or eligible dependents, allowing them to continue submitting claims until the account is depleted. In other cases, the plan may stipulate that any remaining balance is forfeited upon the death of the participant.
Employers have flexibility in how they structure their RRA plans. For instance, one employer might offer an RRA that only reimburses insurance premiums, while another might allow for a broad range of out-of-pocket costs. Because of this variability, a retiree should obtain and read their specific Summary Plan Description (SPD). This document explains the unique rules, limitations, and procedures of their account.