8789 / Is the value of employer-provided coverage under accident or health insurance taxable income to an employee?

Accidental death coverage apparently also is excludable from an employee’s gross income under IRC Section 106(a).²

The IRS has ruled privately that the value of consumer medical cards purchased by a partnership for its employees was excludable from the employees’ income under IRC Section 106(a).³

Where an employer applies salary reduction amounts to the payment of health insurance premiums for employees, the salary reduction amounts are excludable from gross income under IRC Section 106.⁴

On the other hand, an employee must include in income payments received from an employer that may be used to pay the accident and health insurance premiums if those amounts are not required to be used for that purpose.⁵ Employers are generally no longer permitted to reimburse employees for the cost of premiums for individual insurance policies purchased by the employee without incurring a penalty. Beginning in 2017, certain small employers may use a qualified small employer health reimbursement arrangement (QSEHRA) to reimburse employees for the cost of health coverage without incurring a penalty (see Q 8808). Beginning in 2020, individual coverage HRAs (ICHRAs) may be used to reimburse employees for the cost of individual health insurance without incurring a penalty. See Q to Q for details.

Where a taxpayer’s contribution to a fund providing retiree health benefits is deducted from the taxpayer’s after-tax salary, it is considered an employee contribution and is includable in the taxpayer’s income under IRC Section 61. In contrast, where an employer increases or grosses up a taxpayer’s salary and then deducts the fund contribution from the taxpayer’s after-tax salary, the contribution is considered to be an employer contribution that is excludable from the gross income of the taxpayer under IRC Section 106.⁶

The IRS has ruled privately that a return of a premium rider on a health insurance policy was a benefit in addition to accident and health benefits, so that the premium paid by the employer had to be included in the employee’s taxable income.⁷

For purposes of determining the tax treatment of employer-provided accident and health insurance, full time life insurance salespersons are treated as employees if they are employees for Social Security purposes.⁸ Coverage for other commission salespersons is taxable income to the salespersons, unless an employer-employee relationship exists.⁹

Discrimination generally does not affect exclusion of the value of coverage. Even if a self-insured medical expense reimbursement plan discriminates in favor of highly compensated employees, the value of coverage is not taxable; only reimbursements are affected.

For a discussion of the considerations applicable to S corporations, see Q 8966 to Q 8976.