Q&A: Can We Offer Cash Payout for an HRA?

Question:

Our health plan includes a health reimbursement arrangement (HRA) that helps employees pay for medical expenses that are applied to the deductible. One of our employees recently passed away, leaving a large unused HRA balance. Can we pay that balance to the employee’s surviving wife?

Answer:

Yes and no.

If you are asking whether the wife can submit unreimbursed medical expenses, then the answer is yes, assuming your health reimbursement arrangement plan document includes a post-death “spend-down” period. This would allow the wife to seek payment of previously unreimbursed medical expenses that have been incurred not only by the employee, but by any other covered dependents.

In addition, if the wife and/or other dependents were covered on the plan at the time of the employee’s death, then you should offer them COBRA coverage. This would provide them with ongoing access to the HRA funds.

However, if you are asking whether you can simply pay out the remaining HRA balance directly to the wife, then the answer would be no. A cash payout after an employee’s death (or at any other time) would disqualify the HRA for tax purposes for all participants. That means all amounts paid to participants from the HRA would have to be reclassified as taxable income to those participants. In short, you shouldn’t offer a cash payout that can in any way be tied to the deceased employee’s remaining HRA balance.