IRS approves tax treatment of a retiree medical reimbursement plan

Plain-English summary

The IRS ruled that contributions to and coverage under a medical reimbursement plan, along with payments and reimbursements made by the plan, would be excluded from the gross income of eligible retirees and certain family members. The plan was funded through a settlement involving terminated retiree welfare plans and was limited to substantiated medical care expenses, including medical insurance premiums. Unused amounts could carry forward until spent, but the plan provided no cash or other benefits instead of medical reimbursements. The ruling did not address the plan's nondiscrimination requirements or other federal tax issues outside the provisions specifically discussed.

Ruling snapshot

• Question: Are contributions, coverage, payments, and medical expense reimbursements under the retiree medical reimbursement plan excludable from participants' gross income?
• Outcome: Approved, the described contributions, coverage, payments, and reimbursements are excludable under IRC §§ 106 and 105(b)
• Key authorities: IRC §§ 61(a)(1), 105(a)-(b), 106, 152, 213(d), and 501(c)(9); Treas. Reg. §§ 1.61-21(a)(3), 1.105-2, and 1.106-1; Rev. Rul. 2002-41; Notice 2002-45

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201410030 Third Party Communication: None
Release Date: 3/7/2014 Date of Communication: Not Applicable
Index Number: 105.00-00, 105.02-00,
106.00-00 Person To Contact:
-----------------, ID No. ------------------
----------------------------------- Telephone Number:
------------------------------------- ----------------------
---------------------------------- Refer Reply To:
------------------------------ CC:TEGE:EB:HW
--------------------------- PLR-147722-13
------------------- Date:
--------------------------------------- December 02, 2013

Legend

Taxpayer: -----------------------------------

LLC: ----------------------------------

Debtors: ---------------------------------------------

Retiree Welfare Plans: --------------------------------------------------------------------------------
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
------------------------------------------------------

Dear --------------------

This is in reply to your letter dated November 18, 2013 concerning the proper Federal
tax treatment of a medical reimbursement plan under §§ 106 and 105 of the Internal
Revenue Code (the Code).

Debtors filed voluntary petitions for relief under chapter 11 of title 11 of the Bankruptcy
Code. The United States Bankruptcy Court issued an order directing the Office of the
United States Trustee to appoint a retiree committee to represent the interests of the

PLR-147722-13 2

Retiree Welfare Plans’ retirees and beneficiaries. The Debtors had historically provided
a number of benefits to their retired employees, their surviving spouses and eligible
dependents through the Retiree Welfare Plans. The Bankruptcy Court subsequently
issued an order approving the settlement agreement in which Debtors and the retiree
committee mutually agreed to the termination date of the Retiree Welfare Plans. As part
of the settlement agreement, the parties agreed that the Debtors would use the
settlement amount to fund a medical reimbursement plan (the Plan).

Taxpayer created the LLC. In accordance with the terms of the settlement agreement
the settlement amount was paid by the Debtors to the LLC and subsequently
transferred by the LLC to the Taxpayer. The Retiree Welfare Plans were then
terminated. The Taxpayer, which is exempt under §501(c)(9) of the Code, funds the
Plan from the settlement amount.

Taxpayer represents that only eligible retirees, as provided for by the terms of the
settlement agreement, who were receiving, or were eligible to receive benefits under the
Retiree Welfare Plans, may become participants and receive benefits under the Plan.
These include retired employees of one or more of the Debtors, as well as surviving
spouses and eligible dependents.

Taxpayer represents that the allocation made on behalf of each eligible retiree in the
Plan will, in general, constitute the maximum reimbursement amount available for the
retiree under the Plan, subject to reduction for administrative costs and fees. The retiree
will be able to use the full amount allocated to his or her account under the Plan (subject
to reduction for costs and fees). The Plan will only reimburse expenses for medical care
as defined in §213(d) of the Code including out–of-pocket medical expenses and
premiums for medical insurance. Only those medical expenses incurred by a retiree, or
such person’s spouse, dependents and children who have not attained age 27 as of the
end of the taxable year, will be reimbursed. The Plan will reimburse premiums for
insurance covering medical care expenses. Any unused portion in an account under the
Plan at the end of a calendar year will be carried forward and may be used in a
subsequent year until the account is fully spent. No benefits other than reimbursements
of medical expenses will be available under the Plan either as cash or other nontaxable
or taxable benefits. The Plan will reimburse medical expenses only to the extent such
expenses have not been reimbursed from any other source. Each medical expense
submitted for reimbursement under the Plan will be substantiated before reimbursement
is made. Following the death of a retiree, unused amounts will continue to be available
for any remaining beneficiaries of the retiree until the account is fully spent. If any
amount remains in the account following the death of the retiree and eligible
beneficiaries, such amount will be forfeited.

Section 61(a)(1) of the Code and §1.61-21(a)(3) of the Income Tax Regulations
(regulations) provide that, except as otherwise provided in Subtitle A, gross income

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includes compensation for services, including fees, commissions, fringe benefits, and
similar items.

Section 106 provides that gross income of an employee does not include employer
provided coverage under an accident or health plan. Section 1.106-1 of the regulations
provides that the gross income of an employee does not include contributions which the
employee’s employer makes to an accident or health plan for compensation (through
insurance or otherwise) to the employee for personal injuries or sickness incurred by the
employee or the employee’s spouse or dependents (as defined in §152). The employer
may contribute to an accident or health plan either by paying the premium on a policy of
accident or health insurance covering one or more of the employees, or by contributing
to a separate trust or fund which provides accident or health benefits directly or through
insurance to one or more of the employees. However, if the insurance policy, trust or
fund provides other benefits in addition to accident or health, §106 applies only to the
portion of the contributions allocable to accident or health benefits.

Section 105(a) provides that, except as otherwise provided in §105, amounts received
by an employee through accident or health insurance for personal injuries or sickness
shall be included in gross income to the extent such amounts (1) are attributable to
contributions by the employer which were not includible in the gross income of the
employee, or (2) are paid by the employer.

Section 105(b) states that except in the case of amounts attributable to (and not in
excess of) deductions allowed under §213 (relating to medical expenses) for any prior
taxable year, gross income does not include amounts referred to in subsection (a) if
such amounts are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer
for expenses incurred by the taxpayer for the medical care (as defined in § 213(d)) of
the taxpayer or the taxpayer's spouse or dependents (as defined in §152, determined
without regard to subsections (b)(1), (b)(2), and (d)(1)(B)) and any child (as defined in
§152(f)(1)) who has not attained age 27 as of the end of the taxable year. Section
1.105-2 of the regulations provides that only amounts that are paid specifically to
reimburse the taxpayer for expenses incurred by the taxpayer for the prescribed
medical care are excludable from gross income. Thus, §105(b) does not apply to
amounts that the taxpayer would be entitled to receive irrespective of whether or not the
taxpayer incurs expenses for medical care.

In Rev. Rul. 2002-41, 2002-2 C.B. 75, an employer sponsors a health reimbursement
arrangement (HRA) that is paid for solely by the employer and not through salary
reduction contributions. The HRA reimburses substantiated medical care expenses (as
defined in § 213(d)) of participating employees and their spouses and dependents (as
defined in §152) up to a maximum annual reimbursement amount. Unused amounts
from one coverage period are carried forward to subsequent coverage periods.
Participating employees have no right to receive cash or any other benefit in lieu of
medical expense reimbursements. In Situation 2 of Rev. Rul. 2002-41, the maximum

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reimbursement amount under the HRA that is not applied to reimburse medical care
expenses before an employee retires or otherwise terminates employment continues to
be available after retirement or termination for any medical care expense under § 213(d)
incurred by the former employee or the former employee's spouse and dependents. The
ruling concludes that coverage and reimbursements made under the HRA are
excludable from the gross income of participating employees under §§106 and 105.

Notice 2002-45, 2002-2 C.B. 93, provides that an HRA is an arrangement that: (1) is
paid for solely by the employer and not pursuant to salary reduction; (2) reimburses the
employee for medical care expenses (as defined in § 213(d)) incurred by the employee
and the employee’s spouse and dependents (as defined in §152); and (3) provides that
any unused portion of the maximum dollar amount available during the coverage period
is carried forward to subsequent periods. Notice 2002-45 also provides that benefits
under an HRA must be limited to reimbursements of § 213(d) expenses and that all
such expense reimbursements must be substantiated to be excludable under §105.
Notice 2002-45 further provides that medical care expense reimbursements under an
HRA are excludable under §105(b) if the reimbursements are provided to the following
individuals: current and former employees (including retired employees), their spouses
and dependents (as defined in §152 as modified by the last sentence of §105(b)), and
the spouses and dependents of deceased employees.

Based on the information submitted and representations made, we conclude as follows:
contributions to and coverage under the Plan and payments and reimbursements of
medical expenses made by the Plan will be excludable under §§106 and 105(b) of the
Code from the gross income of retirees, their current and surviving spouses, eligible
dependents and children who have not attained age 27 as of the end of the taxable
year.

No opinion is expressed concerning whether the Plan satisfies the nondiscrimination
requirements of §105(h) of the Code and §1.105-11 of the regulations. No opinion is
expressed concerning the Federal tax consequences of the Plan under any other
provision of the Code other than those specifically stated herein. In addition, no opinion
is expressed as to the application of any issue addressed in Notice 2013-54,
2013-40 I.R.B. 287, to the facts of this ruling request.

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This ruling is directed only to the Taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent.

                                     Sincerely,


                                     Harry Beker, Chief
                                     Health & Welfare Branch
                                     Office of Division Counsel/Associate Chief
                                     Counsel (Tax Exempt & Government Entities)