Some employers that have switched from traditional to account-based retiree medical programs, along with others that are considering it, have wondered whether a section 401(h) account — a retiree medical account within a pension plan — can be used to pay retirees’ claims against their health reimbursement arrangements (HRAs). The IRS was recently asked to consider this question and, in private letter ruling (PLR) 201611003, confirmed that such an arrangement is permissible using retiree-only, unfunded HRAs (which are notional accounts).
The 401(h) account in the ruling had “assets in excess of all current and reasonably anticipated future obligations,” and the HRA claims for which these assets would be used include health insurance premiums and other medical expenses. According to the ruling, this arrangement would not violate section 401(h) or otherwise cause the pension plan to lose its tax-qualified status, and the medical benefits for the retired employees would be excludable from their gross income.
This type of arrangement must comply with the requirements for both HRAs and 401(h) accounts. The interaction of these two sets of rules creates a number of technical uncertainties, which were favorably resolved in this ruling.
Unfortunately, the IRS did not provide a detailed rationale for its conclusion. We believe the facts presented by the taxpayer, as well as the careful design of the arrangement in the ruling, played a critical role, though that is not entirely clear.
Given the lack of formal guidance on some key issues and the fact that a PLR cannot be relied upon by other taxpayers, interested sponsors should consult with their legal counsel or seek their own PLR.