Tax Facts

8794 / Are benefits provided under an employer’s noninsured accident and health plan excludable from an employee’s income?

Although there is no particular legal form of plan required, uninsured benefits must be received under some sort of accident and health plan established by the employer for its employees in order to be tax-exempt on the same basis as insured plans.1 An Ohio federal District Court described the “plan” requirement as follows: “there is no legal magic to a form; the essence of the arrangement must determine its legal character.”2


A formal contract of insurance is not required if it is clear that, for an adequate consideration, the company has agreed and has become liable to pay and has paid sickness benefits based upon a reasonable plan of protection established for the benefit of its employees. For example, a provision for disability pay in an employment contract has been held to satisfy the condition.3

For tax purposes, it is not necessary for the plan to be in writing or even that an employee’s rights to benefits under the plan be enforceable. For example, a plan has been found based on an employer’s custom or policy of continuing wages during disability, which was generally known to employees.4

If an employee’s rights are not enforceable, the employee must have been covered by a plan or a program, policy, or custom having the effect of a plan when the employee became sick or injured, and notice or knowledge of the plan must have been readily available to the employee.5 Further, for a plan to exist an employer must commit to certain rules and regulations governing payment and these rules must be made known to employees as a definite policy before accident or sickness arises. Ad hoc payments that are made at the complete discretion of an employer do not qualify as a plan.6

The plan must be for employees. A plan may cover one or more employees and there may be different plans for different employees or classes of employees.7 A plan that is found to cover individuals in a capacity other than their employee status, even though they are employees, is not a plan for employees. For purposes of determining the excludability of employer-provided accident and health benefits, self-employed individuals and certain shareholders owning more than 2 percent of the stock of an S corporation are not treated as employees.8

Further, uninsured medical expense reimbursement plans for employees must meet nondiscrimination requirements for medical expense reimbursements to be tax-free to highly compensated employees. See Q 8795 for a discussion of the nondiscrimination requirements applicable to employer-provided health insurance plans.






1.  IRC § 105(e).

2Epmeier v. U.S., 199 F.2d 508, 511 (7th Cir. 1959).

3Andress v. U.S., 198 F. Supp. 371 (N.D. Ohio 1961).

4Niekamp v. U.S., 240 F. Supp. 195 (E.D. Mo. 1965); Pickle v. Comm., TC Memo 1971-304.

5.  Treas. Reg. § 1.105-5(a).

6Est. of Kaufman, 35 TC 663 (1961), aff’d, 300 F.2d 128 (6th Cir. 1962); Lang v. Comm., 41 TC 352 (1963); Levine v. Comm., 50 TC 422 (1968); Est. of Chism v. Comm., TC Memo 1962-6, aff’d, 322 F.2d 956 (9th Cir. 1963); Burr v. Comm., TC Memo 1966-112; Frazier v. Comm., TC Memo 1994-358; Harris v. U.S., 77-1 USTC ¶ 9414 (E.D. Va. 1977).

7.  Treas. Reg. § 1.105-5(a); Andress, 198 F. Supp. 371 (N.D. Ohio 1961).

8.  IRC § 105(g); Treas. Reg. § 1.105-5(b).


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