Reimbursements to Employees for Health Insurance That They Purchase May Now Be Taxable Wages

Recent IRS interpretation of the ACA or Obama Care rules:  Reimbursements to Employees for Health Insurance That They Purchase May Now Be Taxable Wages

Old Law:  

In 1961 the IRS ruled that an employer’s reimbursement of employees for health insurance policies of the employee’s own choosing (and which the employee buys) can qualify for the exclusion for employer-provided coverage (Revenue Ruling 61-146).  To qualify, the employee was required to document the amounts they paid, and be reimbursed by the employer subject to a “plan”.

New Law:

Obama Care contains “market reform limits” that eliminate the opportunity for some employers to reimburse employee’s under several plans, including medical reimbursement plans, HRA plans, and employer reimbursement of individual insurance premiums.  In order to be able to reimburse, the employee plans would need to meet the “market reforms for group health plans”.  Generally, plans sold to individuals will not meet the requirements for group plans, and thus, may not be treated as part of the group health plan reimbursements.

Summary:

Beginning in 2014 and thereafter, employers are effectively precluded from subsidizing or reimbursing employee health insurance policies pre-tax.   Possible actions include:

  1. Treat the reimbursement of the individual employee-selected health insurance as taxable compensation (not excluded from taxable wages on W-2); or
  2. Provide the employee health insurance benefit that is and ACA/Obama Care approved group health plan; or,
  3. Provide group insurance through the SHOP exchange, funded through a Section 125 plan for pre-tax treatment of the employee premium.

We can help you if you choose to treat the reimbursement as taxable to the employee; however, you will need to contact your insurance professional to assist with options 2 or 3.

Obama Care contains substantial penalties for non-compliance.  If you are reimbursing employees for insurance they have purchased, you must take some action.

 

Written by

Steve Moss, CPA is a partner at Holden Moss CPAs and loves helping businesses and their owners grow to be the very best they can be. Our other offices include Raleigh, Oxford and Warrenton.

We are a little different at Holden Moss CPAs. While we still provide traditional tax and accounting services, years ago we realized many clients wanted help in running their businesses and were hungry for ideas, solutions, strategy, and execution. In response, we expanded our skill set and joined Ran One, a global network of business consulting firms. Our membership with Ran One gives us access to proprietary resources and analytical software to help our clients grow, become more profitable and valuable, and have the lifestyle they desire.

Now, blended into the fabric of our normal tax and accounting needs, we are focused on our clients’ businesses in a very different way. While our approach is not right for everyone, for those whom it is, incredible results may be obtained. Whether you have a new, or established, business, or for those in transition of selling or retiring, or for those who simply need to develop an exit strategy or succession plan, our unique approach to client service may be the edge you need.

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