IRS has released Revenue Ruling 2005-24 which answered the question: "Are amounts paid to an employee under a reimbursement plan that provides for the payment of unused reimbursement amounts in cash or other benefits excludable from gross income under § 105(b) of the Internal Revenue Code (the Code)?"

In their answer, IRS reiterates the rules stating that cash can never be offered to participants from an HRA. If cash is an option under a HRA, every benefit is taxable. In this Ruling, IRS has made it clear that they are not going to waver from this rule.

While this may not be surprising, or even interesting, to you, there is one scenario that illustrates a new possibility for HRAs. In this scenario, the employer automatically and on a mandatory basis contributes the value of all or a portion of the retired employee's unused vacation and sick leave to the employee's HRA. These funds can be used for future HRA-eligible expenses.

Click here to read Revenue Ruling 2005-24.