Employer Reimbursements of Employee Health Insurance
Can an employer reimburse an employee's health insurance premiums tax-free? The answer is yes. The IRS issued a ruling back in 1961 that reimbursement arrangements are permitted as long as (1) the employee pays premiums directly to the insurer (or the employer issues the check to the insurer) and (2) the employee documents both the premium payment and the insurance coverage to the employer. See Revenue Ruling 61-146. If that test is met, the employer will receive a tax deduction for the reimbursement, but receipt of the reimbursement will be tax-free to the employee.
A more interesting question is whether such health insurance reimbursement arrangements can be discriminatory. Can an employer choose to reimburse only owners or other employees and not others? Surprisingly, the answer is "maybe."
The 2010 Affordable Care Act extends nondiscrimination rules to certain fully insured health plans. However, the new law applies only to "group health plans." A standalone individual premium reimbursement arrangement is arguably not a "group health plan" subject to ERISA and HIPAA rules (and, by extension, the Affordable Care Act). There are, however, conflicting court rulings on this question and a variety of other factors that may come into play, so it is not a certainty. In any case, the IRS has delayed implementation of the nondiscrimination rule for the time being until it can gather more commentary from employers and the employee benefits community.
With the ongoing implementation of the Affordable Care Act, these issues will become more common for employers. We encourage you to contact us or your HR benefits consultant or payroll provider for guidance on the health insurance coverage rules.
Accel | 05/21/2013