A Retiree Reimbursement Account follows a specific set of IRS tax rules: the employer funds the account, the retiree submits claims for qualified medical expenses, and those reimbursements stay out of the retiree’s gross income as long as the plan satisfies Sections 105, 106, and 213 of the Internal Revenue Code. Get any of those rules wrong and the reimbursement becomes ordinary taxable income.
Who Funds the Account and What the Retiree Owns
An RRA is a form of Health Reimbursement Arrangement, and under IRS Notice 2002-45 it must be funded entirely by the employer. The retiree cannot add personal money to it.1Internal Revenue Service. Notice 2002-45 – Health Reimbursement Arrangements
The balance is notional. That word matters. The employer books an obligation to reimburse rather than depositing cash into a segregated account the retiree owns. What the retiree holds is a promise, not a pot of money they can withdraw.
Unused amounts at the end of a coverage period carry over and increase the maximum reimbursement available in future periods.1Internal Revenue Service. Notice 2002-45 – Health Reimbursement Arrangements There is no annual “use it or lose it” deadline the way a standard FSA works, so a balance can grow across years of low spending and be drawn down later when medical costs rise.
The tradeoff is portability. If the former employer terminates the plan or goes bankrupt, any remaining notional balance is typically forfeited. A retiree with a $40,000 balance has no legal claim to that money once the plan ceases to exist, unless the plan document specifically provides a payout at termination.
Why Contributions and Reimbursements Are Tax-Free
Two Code sections do the work. Section 106 excludes employer-provided accident and health coverage from an employee’s gross income, and Notice 2002-45 extends that exclusion to former and retired employees.2Office of the Law Revision Counsel. 26 USC 106 – Contributions by Employer to Accident and Health Plans1Internal Revenue Service. Notice 2002-45 – Health Reimbursement Arrangements Section 105 then governs when the money coming back out to pay medical bills stays tax-free.3Office of the Law Revision Counsel. 26 USC 105 – Amounts Received Under Accident and Health Plans
Contributions don’t appear on the retiree’s W-2 or 1099. Reimbursements for qualified expenses don’t either. There is no federal cap on how much an employer can put in; the plan document sets the amount. It only becomes a tax issue if the plan falls out of compliance or the reimbursement covers something it shouldn’t.
What Counts as a Qualified Medical Expense
A reimbursement is tax-free only if it covers “medical care” as defined in Section 213(d). That definition reaches doctor visits, hospital care, prescription drugs, dental and vision care, medical equipment, and expenses that treat or prevent disease or affect a structure or function of the body.4Office of the Law Revision Counsel. 26 USC 213 – Medical, Dental, Etc., Expenses
For retirees, insurance premiums do a lot of the heavy lifting. Medicare Part B premiums appear directly in the statute’s definition of medical care, and IRS guidance treats Part A, Part C Medicare Advantage, and Part D prescription drug premiums the same way.4Office of the Law Revision Counsel. 26 USC 213 – Medical, Dental, Etc., Expenses Deductibles, copays, and coinsurance that Medicare doesn’t cover also qualify.
Long-Term Care Insurance Premium Caps
Long-term care insurance premiums qualify, but only up to age-based annual limits. For the 2026 tax year, the per-person caps are:
- Age 40 or younger: $500
- Age 41 through 50: $930
- Age 51 through 60: $1,860
- Age 61 through 70: $4,960
- Over age 70: $6,200
Any premium above the cap for the retiree’s age isn’t a qualified expense and can’t be reimbursed tax-free. The policy also has to meet the federal definition of a tax-qualified long-term care insurance contract.
Expenses That Don’t Qualify
Cosmetic procedures without a medical purpose, gym memberships (unless prescribed for a specific condition), and general wellness supplements typically fall outside Section 213(d). Premiums already paid on a pre-tax basis through a pension plan or payroll deduction can’t be reimbursed either, because the retiree has already received a tax benefit on that money.
The Double-Dipping Rule
Section 105(b) blocks any attempt to get two tax benefits from the same medical bill. If the retiree previously deducted a medical expense on Schedule A of Form 1040, a later reimbursement from the RRA for that same expense becomes taxable income.3Office of the Law Revision Counsel. 26 USC 105 – Amounts Received Under Accident and Health Plans The statute states the exclusion doesn’t apply to amounts covered by a Section 213 deduction the retiree already took.
The simplest rule: if you deducted it, don’t submit it for reimbursement.
Coordination With a Health Savings Account
A retiree who still has a High Deductible Health Plan and wants to keep contributing to an HSA has to watch the design of the RRA. A standard RRA that reimburses medical expenses from the first dollar is treated as “other health coverage” under Section 223 and disqualifies the retiree from making HSA contributions.
The workaround is a “post-deductible” RRA that pays nothing until the participant has satisfied at least the statutory minimum annual deductible for HSA-qualifying coverage. For 2026, those minimum deductibles are $1,700 for self-only coverage and $3,400 for family coverage.5Internal Revenue Service. Rev. Proc. 2025-19 – 2026 Inflation Adjusted Items If the RRA and the HDHP set different deductibles, HSA contributions are limited based on the lower of the two, and for family coverage the RRA cannot reimburse any individual’s expenses before the full family HDHP deductible has been satisfied.
Nondiscrimination Testing
An RRA is a self-insured medical reimbursement plan, so Section 105(h) applies. The plan has to pass two tests: an eligibility test on who can participate, and a benefits test on whether the benefits favor highly compensated individuals.6Office of the Law Revision Counsel. 26 USC 105 – Amounts Received Under Accident and Health Plans – Section 105(h)
For eligibility, the plan generally has to benefit at least 70 percent of all employees, or at least 80 percent of eligible employees if 70 percent or more are eligible. Employees with fewer than three years of service, those under age 25, part-time and seasonal workers, and certain collectively bargained employees can be excluded from the count.6Office of the Law Revision Counsel. 26 USC 105 – Amounts Received Under Accident and Health Plans – Section 105(h)
When a plan fails these tests, the plan itself doesn’t lose its status. Instead, reimbursements paid to highly compensated individuals lose their tax-free treatment, and those individuals include the excess in gross income at ordinary rates.6Office of the Law Revision Counsel. 26 USC 105 – Amounts Received Under Accident and Health Plans – Section 105(h) For this purpose, a highly compensated individual means one of the five highest-paid officers, a shareholder owning more than 10 percent of the employer’s stock, or someone in the top 25 percent of employees by pay.
Survivors and Plan Termination
Notice 2002-45 confirms that an HRA may reimburse the medical expenses of a deceased employee’s spouse and dependents, and most RRA plans allow a surviving spouse and eligible dependents to keep using the remaining balance.1Internal Revenue Service. Notice 2002-45 – Health Reimbursement Arrangements Whether that survivor access is included, and for how long, depends on the plan document.
Termination is different. Because the balance is a notional promise rather than a funded account, an employer that ends the plan usually wipes out the remaining balance. There is no FDIC-style protection and no ability to roll the money elsewhere.
Documentation the Retiree Needs to Keep
Every reimbursement has to be substantiated. For a typical medical expense, that means a receipt, invoice, or Explanation of Benefits from the insurance provider.
Medicare Part B premiums have a specific proof requirement: the retiree needs to show the premium was actually paid. When the premium is deducted from a Social Security check, the annual Cost of Living Adjustment statement showing the Medicare deduction serves as proof. When the retiree pays Medicare directly, they need the Medicare bill together with a cleared check, bank statement, or credit card statement showing payment.
RRA contributions and qualified reimbursements aren’t reported on the retiree’s W-2 or 1099. If the plan is set up improperly or reimburses non-qualified expenses, those amounts may need to be reported as taxable income, and that reporting failure compounds the underlying tax problem.
Penalties When the Plan Falls Out of Compliance
Employers who fail group health plan requirements face an excise tax under Section 4980D of $100 per day per affected individual, running from the date the violation begins until it is corrected. If the failure is discovered during an IRS examination and hasn’t been corrected, the minimum tax is $2,500 per individual, and for violations that are more than minor the floor rises to $15,000 per individual.7Office of the Law Revision Counsel. 26 USC 4980D – Failure to Meet Certain Group Health Plan Requirements
The retiree doesn’t pay the excise tax directly. What the retiree absorbs is the tax on reimbursements that were supposed to be tax-free: if the plan loses its status or a specific reimbursement is deemed non-qualified, the retiree includes that amount in gross income and pays ordinary income tax on it.