When an employee passes away, employers often face challenging questions regarding benefits and compensation. A common question that arises is whether an employer can pay a deceased employee’s unused Health Reimbursement Arrangement (HRA) balance to the surviving spouse. This article delves into the regulations and best practices surrounding HRAs in such scenarios, ensuring compliance and clarity.
HRAs and Their Restrictions
Health Reimbursement Arrangements (HRAs) are designed to reimburse employees for qualifying medical expenses, as outlined in Code § 213(d). Importantly, HRAs are not allowed to disburse cash payments to employees or their beneficiaries at any time, including after the employee’s death. Any attempt to convert HRA balances into cash would disqualify the HRA for all participants, rendering all reimbursed amounts taxable—even those for legitimate medical expenses.
The Concept of Post-Death Spend-Downs
While direct cash payments are prohibited, HRAs can include a provision known as a post-death “spend-down.” This feature allows the remaining HRA balance to be used to cover qualifying medical expenses for the deceased employee’s surviving spouse, tax dependents, and qualifying children. Employers should check their HRA plan documents to see if this feature is included and, if not, consider amending the plan to incorporate it.
Compliance and Nondiscrimination Rules
Amending an HRA plan to include a post-death spend-down feature must comply with several nondiscrimination rules. These rules ensure that benefits are not skewed in favor of highly compensated individuals. Specifically, all benefits provided to highly compensated participants must also be made available to all other participants.
Additionally, IRS Notice 2015-87 casts some uncertainty on whether family members without major medical coverage can utilize a post-death spend-down feature. Until further clarification from the IRS, a cautious approach would be to limit these reimbursements to family members who also have major medical coverage.
Administering Post-Death Spend-Downs
Proper administration of the post-death spend-down feature is crucial. Only qualifying medical expenses for eligible individuals should be reimbursed. Failure to adhere to this can result in all HRA reimbursements becoming taxable, not just those for ineligible expenses. Employers must also remember their obligations under COBRA. If a deceased employee’s death triggers a COBRA qualifying event, then qualified beneficiaries must be given the opportunity to continue their HRA coverage for the duration prescribed by COBRA, regardless of the presence of a post-death spend-down feature.
Conclusion
While it may seem compassionate to pay out a deceased employee’s unused HRA balance to their surviving spouse, doing so would jeopardize the tax-advantaged status of the HRA for all participants. Instead, employers should explore the option of a post-death spend-down feature, ensuring they comply with all relevant nondiscrimination rules and administrative guidelines. By carefully navigating these regulations, employers can support their employees’ families while maintaining the integrity of their HRA plans.
ORLANDO, Florida – EBenefitsHub is pleased to announce its addition of NueSynergy as an Exclusive National Core Partner. “We are excited to include the fully integrated suite of administration services assembled by Josh Collins, President, and the rest of the NueSynergy team over the past 27 years,” said EBenefitsHub Founder and CEO, Nick Gregory, ChWE. “NueSynergy has earned respect for its industry-leading service, innovative technology, and excellence in providing full-service administration of consumer-driven and traditional account-based plans among other solutions.”:
Flexible Spending Accounts, Health Reimbursement Arrangements, Health Savings Accounts, Lifestyle Spending Accounts, SpouseSaver Incentive Accounts, COBRAcare+ Administration, Premium Only Plans, Combined Billing, Direct Billing, and Private Label Solutions.
“NueSynergy continues to expand its national presence by offering a wide variety of forward-thinking, employer-centric products and services,” said Josh Collins, president of NueSynergy. “It’s important for us to work alongside an elite and diverse group of reputable companies to build solutions and long-term relationships for our mutual clients.”
With this announcement, NueSynergy joins a collection of exclusive, best-of-breed CorePartner organizations to provide services and products to BenefitsPros across the country. The result is the fusion of advanced knowledge, experience, services, technology, and products to create a synchronized hub for BenefitsPros and their business clients.
“We have engineered a modernized suite of snap-on digital solutions coupled with an arsenal of resources necessary for employee benefits providers to prevail within today’s competitively complex employee benefits landscape,” said Nick Gregory. “BenefitsPros can design and build their digital benefits hub . . . as they wish.
“With the help of NueSynergy and our other CorePartners, BenefitsPros can embrace the digital revolution, bridging the gaps while cutting away the bad plumbing of detached digital and manual processes . . . their way. They can neutralize competitors, expand client offerings, harvest more clients, and future-proof success. In a sea of sameness, BenefitsPros can brand, position, and differentiate to create an unfair advantage.”
About NueSynergy
NueSynergy, Inc., a privately held company, is one of the nation’s fastest growing employee benefits and billing administrators in the country. Headquartered in Leawood, Kansas, NueSynergy also has locations in Arizona, Florida, Idaho, North Carolina, Virginia, Washington, and Rzeszów, Poland.
NueSynergy offers a fully integrated suite of administration services, which include Health Savings Account (HSA), Health Reimbursement Arrangement (HRA), Flexible Spending Account (FSA), Lifestyle Savings Account (LSA), and COBRAcare+ administration as well as SpouseSaver Incentive Account, Combined Billing, Direct Billing, and Specialty Solutions. For more information, visit www.NueSynergy.com.
About EBenefitsHub
EBenefitsHub has engineered a modernized suite of snap-on digital solutions synchronized within its holistic EBHub Dashboard and “white label” All-In-One MobileFirst App. The EBHub “ecosystem” is coupled with an arsenal of resources necessary for benefits professionals to prevail within today’s competitively complex benefits landscape. BenefitsPros can design/build their digital benefits hubs . . . on their terms. With the help of EBHub CorePartners, BenefitsPros can embrace the digital revolution; bridging the gaps while cutting away the bad plumbing of detached digital and manual processes.
They can neutralize competitors, expand client offerings, harvest more clients and future-proof success. In a sea of sameness, BenefitsPros can brand, position and differentiate to create an unfair advantage. The result is seamlessly harmonized employee benefits, engagement and communications, merged into a powerfully holistic platform for BenefitsPros and their clients:
