PLR Permits Employee Choice Between Profit-Sharing Plan and HRA

A recent IRS Private Letter Ruling (PLR) finds that an amendment allowing employees to choose how much of an employer contribution to allocate between a profit-sharing plan and health reimbursement arrangement (HRA) would not cause the plan to be treated as a cash offering or deferred arrangement or adversely affect the tax treatment of the HRA.

 

PLR 20202300, dated March 3, 2020 but released June 5, responds to a taxpayer inquiry asking for clarification to verify that an employee union’s proposed amendments won’t cause a qualified profit-sharing plan to be treated as offering a cash or deferred arrangement, pursuant to Internal Revenue Code Section 401(k).

The taxpayer also asks for clarification on whether the proposed amendment to the HRA plan would affect the tax treatment of contributions to the HRA or the payment amounts made from the Trust to the HRA that are used to pay for qualified medical expenses as excludible from gross income.

 

 

Under a collective bargaining arrangement, the taxpayer proposed to have a set minimum of the employer contribution to be contributed to the HRA, while the remaining discretionary portion would be allocated between the profit-sharing DC plan and the HRA, pursuant to an annual election by the employee before the beginning of the plan year. 

 

In the absence of an election, a default uniform fixed contribution will be allocated to the profit-sharing plan and the remaining portion of the discretionary contribution will be allocated to the HRA plan. 

 

 

Regarding the first request, the IRS explains that while employees are permitted to make an annual irrevocable election regarding to which plan the contributions are to be made, they are not permitted to elect to have the contributions paid in cash or some other taxable benefit. Accordingly, under the scenario presented to the IRS, the proposed amendment to the DC plan will not cause the plan to be treated as offering a cash or deferred arrangement pursuant to Section 401(k).

 

Under the HRA plan, the IRS reviews the conditions that, if the employee timely makes an irrevocable annual election to have an employer contribute amounts to the HRA plan in lieu of the profit-sharing plan, such amounts are paid solely by the participating employers and not pursuant to salary reduction elections or otherwise. In addition, the IRS notes that the amounts may be used to provide benefits that reimburse qualified eligible medical expenses, but may not be used to provide for the payment of death benefits, bonuses or separation pay, or to provide other taxable or nontaxable benefits.

 

As such, the IRS advises that the HRA plan meets the requirements of Rev. Rul. 2002-41 and Notice 2002-45, and the amounts are excludable from the gross income of employees, retired employees and their spouses and dependents under Code Sections 105(b) and 106. 

 

 

Note that an IRS private letter ruling applies only to the taxpayer who requested it and may not be used as precedent nor official guidance, but it does provide insight on how the IRS may rule in similar circumstances.