Employer Sponsored Accident And Health Insurance Benefits

November 05, 2024

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

<div class="Section1"> Eligible small employers may take advantage of a tax credit for employee health insurance expenses for taxable years beginning after December 31, 2009, provided the employer offers health insurance to its employees and makes a non-elective contribution on behalf of each employee who participates in the plan.<a href="#_ftn1" name="_ftnref1">1</a> An eligible small employer is defined as an employer that has no more than 25 full time employees, the average annual wages of whom do not exceed $61,400 (in 2023, $57,400 for 2022, $55,600 for 2021 and $55,200 for 2020).<a href="#_ftn2" name="_ftnref2">2</a> In order to qualify, the employer must have a contribution arrangement for each employee who enrolls in the health plan offered by the employer through an exchange that requires that the employer make a non-elective contribution in an amount equal to a uniform percentage, not less than 50 percent, of the premium cost.<a href="#_ftn3" name="_ftnref3">3</a> Subject to phase-out<a href="#_ftn4" name="_ftnref4">4</a> based on the number of employees and average wages, the amount of the credit is equal to 50 percent, and 35 percent in the case of tax-exempt organizations, of the lesser of: (1)the aggregate amount of non-elective contributions made by the employer on behalf of its employees for health insurance premiums for health plans offered by the employer to employees through an exchange; or (2)the aggregate amount of non-elective contributions the employer would have made if each employee had been enrolled in a health plan that had a premium equal to the average premium for the small group market in the ratings area.<a href="#_ftn5" name="_ftnref5">5</a> For years 2010 through 2013, the following modifications apply in determining the amount of the credit: (1)The credit percentage is reduced to 35 percent (25 percent in the case of tax-exempt entities).<a href="#_ftn6" name="_ftnref6">6</a> (2)The amount under (1) is determined by reference to non-elective contributions for premiums paid for health insurance, and there is no exchange requirement.<a href="#_ftn7" name="_ftnref7">7</a> (3)The amount under (2) is determined by the average premium for the state small group market.<a href="#_ftn8" name="_ftnref8">8</a> The credit also is allowed against the alternative minimum tax.<a href="#_ftn9" name="_ftnref9">9</a> <div style="border-top: solid 0.5pt windowtext;padding-top: 1pt;border-bottom: solid 0.5pt windowtext;padding-bottom: 1pt"> <div> Planning Point: Proposed regulations explain how to calculate employer tax credits after 2013.<a href="#_ftn10" name="_ftnref10">10</a> The regulations propose that the maximum credit for taxable years after 2014 (available for only two years) increase to 50 percent (35 percent for tax-exempt organizations), with some adjustments. There is a proposed phase out for small employers with more than ten employees or whose average annual wages exceed $25,000 (adjusted for inflation). In addition, the proposed regulations clarify that employer contributions to an HRA, FSA, or HSA are not considered premium payments<a href="#_ftn11" name="_ftnref11">11</a> (See <a href="https://www.thinkadvisor.com/tax-facts/2024/03/13/8840-what-tax-credit-is-available-for-employers-who-purchase-health-insurance-when-does-the-credit-become-available/">Q 8840</a>.) </div> </div> </div> <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 45R, as added by PPACA 2010. <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 45R(d), as added by PPACA 2010; IRC Sec. 45R(d)(3)(B), as amended by Section 10105(e)(1) of PPACA 2010. <a href="#_ftnref3" name="_ftn3">3</a>. IRC § 45R(d)(4), as added by PPACA 2010. <a href="#_ftnref4" name="_ftn4">4</a>. IRC § 45R(c), as added by PPACA 2010. <a href="#_ftnref5" name="_ftn5">5</a>. IRC § 45R(b), as added by PPACA 2010. <a href="#_ftnref6" name="_ftn6">6</a>. IRC § 45R(g)(2)(A), as added by PPACA 2010. <a href="#_ftnref7" name="_ftn7">7</a>. IRC § 45R(g)(2)(B), 45R(g)(3), as added by PPACA 2010. <a href="#_ftnref8" name="_ftn8">8</a>. IRC § 45R(g)(2)(C), as added by PPACA 2010. <a href="#_ftnref9" name="_ftn9">9</a>. IRC § 38(c)(4)(B), as amended by PPACA 2010. The IRS has issued guidance; see Notice 2010-44, 2010-22 IRB 717; Notice 2010-82, 2010-51 IRB 1. <a href="#_ftnref10" name="_ftn10">10</a>. 2013 IRB LEXIS, 2013-38 IRB 211 (modifying Notice 2010-44, 2010-22 IRB 717; Notice 2010-82, 2010-51 IRB 1). <a href="#_ftnref11" name="_ftn11">11</a>. Prop. Treas. Reg. §1.45R-3. </div>

October 28, 2024

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

<div class="Section1">Generally, no. This includes medical expense and dismemberment and sight loss coverage for the employee, the employee’s spouse and dependents, and coverage providing for disability income for the employee. Unlike the exclusion for group-term life insurance, there is no specific limit on the amount of employer-provided accident or health coverage that may be excluded from an employee’s gross income. Further, coverage is tax-exempt to an employee when it is provided under a group insurance policy.<a href="#_ftn1" name="_ftnref1">1</a> Similarly, the employee is not taxed on the value of critical illness coverage.<div class="Section1"> Accidental death coverage apparently also is excludable from an employee’s gross income under IRC Section 106(a).<a href="#_ftn2" name="_ftnref2">2</a> 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).<a href="#_ftn3" name="_ftnref3">3</a> 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.<a href="#_ftn4" name="_ftnref4">4</a> 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.<a href="#_ftn5" name="_ftnref5">5</a> 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 <a href="javascript:void(0)" class="accordion-cross-reference" id="8808">8808</a>). 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 <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id=""></a> 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.<a href="#_ftn6" name="_ftnref6">6</a> 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.<a href="#_ftn7" name="_ftnref7">7</a> 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.<a href="#_ftn8" name="_ftnref8">8</a> Coverage for other commission salespersons is taxable income to the salespersons, unless an employer-employee relationship exists.<a href="#_ftn9" name="_ftnref9">9</a> 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 <a href="javascript:void(0)" class="accordion-cross-reference" id="8966">8966</a> to Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8976">8976</a>. </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 106(a). See also Treas. Reg. § 1.106-1; Rev. Rul. 58-90, 1958-1 CB 88; Rev. Rul. 56-632, 1956-1 CB 101. <a href="#_ftnref2" name="_ftn2">2</a>.  Treas. Reg. § 1.106-1; Treas. Reg. § 1.79-1(f)(3); Let. Ruls. 8801015, 8922048. <a href="#_ftnref3" name="_ftn3">3</a>.  Let. Rul. 9814023. <a href="#_ftnref4" name="_ftn4">4</a>.  Rev. Rul. 2002-03, 2002-1 CB 316. <a href="#_ftnref5" name="_ftn5">5</a>.  Rev. Rul. 75-241, 975-1 CB 316, Let. Rul. 9022060. See also Let. Rul. 9104050. <a href="#_ftnref6" name="_ftn6">6</a>.  Let. Rul. 9625012. <a href="#_ftnref7" name="_ftn7">7</a>.  Let. Rul. 8804010. <a href="#_ftnref8" name="_ftn8">8</a>.  IRC § 7701(a)(20). <a href="#_ftnref9" name="_ftn9">9</a>.  Rev. Rul. 56-400, 1956-2 CB 116; see also IRC § 3508. </div></div>

October 28, 2024

8798 / What nondiscrimination requirements apply to self-insured health plans?

<div class="Section1">The nondiscrimination requirements set forth in IRC Section 105(h) apply to self-insured health benefits, although the IRS announced in Notice 2011-1 on December 22, 2010, that compliance with nondiscrimination rules for other health insurance plans will be delayed until regulations or other administrative guidance has been issued. The IRS indicated that the guidance will not apply until plan years beginning in a specified period after guidance is issued.<div class="Section1"> Benefits received pursuant to a self-insured plan are generally excludable from an employee’s gross income. Despite this, if a self-insured medical expense reimbursement plan or the self-insured part of a partly-insured medical expense reimbursement plan discriminates in favor of highly compensated individuals, certain amounts paid to the highly compensated individuals will be taxable to those highly compensated individuals. A medical expense reimbursement plan cannot be implemented retroactively because, if this were permitted, the nondiscrimination requirements of IRC Section 105 would be ineffective.<a href="#_ftn1" name="_ftnref1">1</a> A self-insured plan may not discriminate in favor of highly compensated individuals either with respect to eligibility to participate or benefits. Eligibility A plan discriminates as to eligibility to participate unless the plan benefits: <blockquote>(1)  70 percent or more of all employees, or 80 percent or more of all the employees who are eligible to benefit under the plan if 70 percent or more of all employees are eligible to benefit under the plan; or (2)  employees who qualify under a classification set up by the employer and found by the IRS not to be discriminatory in favor of highly compensated individuals.<a href="#_ftn2" name="_ftnref2">2</a></blockquote> For purposes of these eligibility requirements, an employer is not required to consider those employees who: <blockquote>(1)  have not completed three years of service at the beginning of the plan year; however, years of service during which an individual was ineligible under (2), (3), (4), or (5) below must be counted for this purpose; (2)  have not attained age 25 at the beginning of the plan year; (3)  are part-time or seasonal employees; (4)  are covered by a collective bargaining agreement if health benefits were the subject of good faith bargaining; or (5)  are nonresident aliens with no U.S.-source earned income.<a href="#_ftn3" name="_ftnref3">3</a></blockquote> Part-time and Seasonal Workers Part-time employees include those employees who are customarily employed for fewer than 35 hours per week. Seasonal employees are those who are customarily employed for fewer than nine months per year. In determining whether an employee is part-time or seasonal, the IRS will consider whether similarly situated employees of the employer (or employees in the same industry or location as the employer) are employed for substantially more hours or months, as applicable. A safe harbor rule provides that employees customarily employed for fewer than 25 hours per week or seven months per year may automatically be considered part-time or seasonal.<a href="#_ftn4" name="_ftnref4">4</a> Benefits A plan discriminates as to benefits unless all benefits provided for participants who are highly compensated individuals are provided for all other participants.<a href="#_ftn5" name="_ftnref5">5</a> If some participants become eligible for benefits immediately and others only after a waiting period, benefits are not considered to be available to all participants.<a href="#_ftn6" name="_ftnref6">6</a> Benefits available to dependents of highly compensated employees must be equally available to dependents of all other participating employees. The test is applied to benefits subject to reimbursement, rather than to actual benefit payments or claims. Any maximum limit on the amount of reimbursement must be uniform for all participants and for all dependents, regardless of years of service or age. Further, if the type or amount of benefits subject to reimbursement is offered in proportion to compensation and highly compensated employees are covered by the plan, the plan will be found to discriminate with regard to benefits. A plan will not be considered discriminatory in operation merely because highly compensated participants use a broad range of plan benefits to a greater extent than other participants.<a href="#_ftn7" name="_ftnref7">7</a> The nondiscrimination rules are not violated merely because benefits under the plan are offset by benefits paid under a self-insured or insured plan of the employer, of another employer, or by benefits paid under Medicare or other federal or state law. A self-insured plan may take into account benefits provided under another plan only to the extent that the benefit is the same under both plans.<a href="#_ftn8" name="_ftnref8">8</a> Benefits provided to a retired employee who was highly compensated must be the same as benefits provided to all other retired participants. For purposes of applying the nondiscrimination rules, all employees of a controlled group of corporations, or employers under common control, and of members of an affiliated service group are treated as employed by a single employer.<a href="#_ftn9" name="_ftnref9">9</a> Highly Compensated Individual An employee is a highly compensated individual if the employee falls into any one of the following three classifications: <blockquote>(1)  The employee is one of the five highest paid officers. (2)  The employee is a shareholder who owns, either actually or constructively through application of the attribution rules, more than 10 percent in value of the employer’s stock. (3)  The employee is among the highest paid 25 percent, rounded to the nearest higher whole number, of all employees other than excludable employees who are not participants and not including retired participants.<a href="#_ftn10" name="_ftnref10">10</a> Fiscal year plans may determine compensation on the basis of the calendar year ending in the plan year.</blockquote> A participant’s status as officer or stockholder with respect to a particular benefit is determined at the time when the benefit is provided.<a href="#_ftn11" name="_ftnref11">11</a> See Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8799">8799</a> for a discussion of the tax consequences to a self-insured plan that is found to be discriminatory under these rules. </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  Wollenburg v. U.S., 75 F. Supp. 2d 1032, 1035 n.2 (D. Neb. 1999) (noting that “an employer can choose to benefit or hurt certain employees with much greater precision, with the benefit of hindsight.”); American Family Mut. Ins. Co. v. U.S., 815 F. Supp. 1206 (W.D. Wis. 1992). See also Rev. Rul. 2002-58, 2002-38 IRB 541. <a href="#_ftnref2" name="_ftn2">2</a>.  IRC § 105(h)(3)(A). <a href="#_ftnref3" name="_ftn3">3</a>.  IRC § 105(h)(3)(B). <a href="#_ftnref4" name="_ftn4">4</a>.  Treas. Reg. § 1.105-11(c). <a href="#_ftnref5" name="_ftn5">5</a>.  IRC § 105(h)(4). <a href="#_ftnref6" name="_ftn6">6</a>.  Let. Ruls. 8411050, 8336065. <a href="#_ftnref7" name="_ftn7">7</a>.  Treas. Reg. § 1.105-11(c)(3). <a href="#_ftnref8" name="_ftn8">8</a>.  Treas. Reg. § 1.105-11(c)(1). <a href="#_ftnref9" name="_ftn9">9</a>.  IRC § 105(h). <a href="#_ftnref10" name="_ftn10">10</a>.  IRC § 105(h)(5). <a href="#_ftnref11" name="_ftn11">11</a>.  Treas. Reg. § 1.105-11(d). </div></div>

October 28, 2024

8799 / What are the tax consequences for amounts paid by an employer to highly compensated employees under a discriminatory self-insured medical expense reimbursement plan?

<div class="Section1">If a self-insured medical reimbursement plan is found to be discriminatory in favor of highly compensated employees, those highly compensated employees may be taxed on reimbursed amounts provided under the plan. The taxable amount of payments is the “excess reimbursement.”<a href="#_ftn1" name="_ftnref1">1</a> The two situations discussed below will produce an excess reimbursement.</div> <div class="Section1"> The first situation occurs when a benefit is available to a highly compensated individual but not to all other participants, or if the benefit otherwise discriminates in favor of highly compensated individuals. In this case, the total amount reimbursed under the plan to the employee with respect to that benefit is an excess reimbursement. The second situation occurs when a plan discriminates as to participation, even though all benefits are available to all other participants and are not otherwise discriminatory. If this is the case, the excess reimbursement is determined by multiplying the total amount reimbursed to the highly compensated individual for the plan year by a fraction. The numerator of this fraction is the total amount reimbursed to all participants who are highly compensated individuals under the plan for the plan year and the denominator is the total amount reimbursed to all employees under the plan for such plan year. In determining the fraction, any reimbursement attributable to a benefit not available to all other participants is not taken into account.<a href="#_ftn2" name="_ftnref2">2</a> Multiple plans may be designated as a single plan for purposes of satisfying nondiscrimination requirements. If an employee elects to participate in an optional HMO offered by the plan, that employee is considered benefited by the plan only if the employer’s contributions with respect to the employee are at least equal to what would have been made to the self-insured plan and the HMO is designated, with the self-insured plan, as a single plan. Unless a plan provides otherwise, reimbursements will be attributed to the plan year in which payment is made. Accordingly, they will be subject to tax in an individual’s tax year in which a plan year ends. Amounts reimbursed for medical diagnostic procedures for employees, but not dependents, performed at a facility that provides only medical services are not considered a part of a plan and do not come within these rules requiring nondiscriminatory treatment.<a href="#_ftn3" name="_ftnref3">3</a> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 105(h)(1). <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 105(h)(7). <a href="#_ftnref3" name="_ftn3">3</a>. Treas. Reg. § 1.105-11(g). </div>

June 18, 2024

8801 / Are benefits received under a personal health insurance policy taxable income?

<div class="Section1">No. All kinds of benefits from personal health insurance generally are entirely exempt from income tax. This exemption applies to disability income, dismemberment and sight loss benefits, critical illness benefits,<a href="#_ftn1" name="_ftnref1">1</a> and hospital, surgical, and other medical expense reimbursement. The taxpayer is not limited as to the amount of benefits, including the amount of disability income that he or she can receive tax-free under personally paid health insurance or under an arrangement having the effect of accident or health insurance.<a href="#_ftn2" name="_ftnref2">2</a> However, courts have held that the IRC Section 104(a)(3) exclusion will be denied where a taxpayer’s claims for insurance benefits were not made in good faith and were not based on a true illness or injury.<a href="#_ftn3" name="_ftnref3">3</a></div> <div class="Section1"> If a health insurance policy provides for accidental death benefits, the proceeds of these death benefits may be tax-exempt to the policy beneficiary as death proceeds of life insurance.<a href="#_ftn4" name="_ftnref4">4</a> A taxpayer may exclude from gross income disability benefits received for loss of income or earning capacity under no fault insurance.<a href="#_ftn5" name="_ftnref5">5</a> The exclusion also has been applied where the policies were provided to the insured taxpayer by a professional service corporation in which the insured was the sole stockholder.<a href="#_ftn6" name="_ftnref6">6</a> Health insurance benefits are also tax-exempt if received by a person who has an insurable interest in the individual insured by the policy, rather than by that individual himself.<a href="#_ftn7" name="_ftnref7">7</a> Medical expense reimbursement benefits will impact the amount that a taxpayer is allowed to deduct for medical expenses. Because only unreimbursed expenses are deductible, the total amount of medical expenses paid during a taxable year must be reduced by the total amount of reimbursements received in that taxable year.<a href="#_ftn8" name="_ftnref8">8</a> Similarly, if the taxpayer deducts medical expenses in the year they are paid and then receives reimbursement in a later year, the taxpayer (or the taxpayer’s estate, where the deduction is taken on the decedent’s final return but later reimbursed to the taxpayer’s estate) must include the reimbursement, to the extent of the prior year’s deduction, in gross income for the later year.<a href="#_ftn9" name="_ftnref9">9</a> Where the value of a decedent’s right to reimbursement proceeds, which is income in respect of a decedent,<a href="#_ftn10" name="_ftnref10">10</a> is included in the decedent’s estate, an income tax deduction is available for the portion of estate tax attributable to such value. Disability income is not treated as reimbursement for medical expenses and, therefore, does not offset such expenses.<a href="#_ftn11" name="_ftnref11">11</a> <blockquote>Example: Ryan, whose adjusted gross income for 2024 was $25,000, paid $4,000 in medical expenses during that year. On his 2024 return, he deducted medical expenses totaling $2,125 [$4,000 – $1,875 (7.5 percent of his adjusted gross income)]. In 2025, Ryan receives the following benefits from his health insurance: disability income of $1,200 and reimbursement for 2024 doctor and hospital bills of $400. He must report $400 as taxable income on his 2025 return. Had Ryan received the reimbursement in 2024, his medical expense deduction for that year would have been limited to $1,725 (4,000 – $400 [reimbursement] – $1,875 [7.5 percent of adjusted gross income]). Otherwise, he would have received the entire amount of insurance benefits, including the medical expense reimbursement, tax-free.</blockquote> </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. See, e.g., Let Rul. 200903001. <a href="#_ftnref2" name="_ftn2">2</a>. IRC § 104(a)(3); Rev. Rul. 55-331, 1955-1 CB 271, modified by Rev. Rul. 68-212, 1968-1 CB 91; Rev. Rul. 70-394, 1970-2 CB 34. <a href="#_ftnref3" name="_ftn3">3</a>. Dodge v. Comm., 981 F.2d 350 (8th Cir. 1992). <a href="#_ftnref4" name="_ftn4">4</a>. IRC § 101(a); Treas. Reg. § 1.101-1(a). <a href="#_ftnref5" name="_ftn5">5</a>. Rev. Rul. 73-155, 1973-1 CB 50. <a href="#_ftnref6" name="_ftn6">6</a>. Let. Rul. 7751104. <a href="#_ftnref7" name="_ftn7">7</a>. IRC § 104; Castner Garage, Ltd. v. Comm., 43 BTA 1 (1940), acq. 1941-1 CB 11. <a href="#_ftnref8" name="_ftn8">8</a>. Rev. Rul. 56-18, 1956-1 CB 135. <a href="#_ftnref9" name="_ftn9">9</a>. Treas. Reg. §§ 1.104-1, 1.213-1(g); Rev. Rul. 78-292, 1978-2 CB 233. <a href="#_ftnref10" name="_ftn10">10</a>. Rev. Rul. 78-292, above. <a href="#_ftnref11" name="_ftn11">11</a>. Deming v. Comm., 9 TC 383 (1947), acq. 1948-1 CB 1. </div>

June 14, 2024

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

<div class="Section1">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.<a href="#_ftn1" name="_ftnref1">1</a> 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.”<a href="#_ftn2" name="_ftnref2">2</a><div class="Section1"> 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.<a href="#_ftn3" name="_ftnref3">3</a> 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.<a href="#_ftn4" name="_ftnref4">4</a> 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.<a href="#_ftn5" name="_ftnref5">5</a> 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.<a href="#_ftn6" name="_ftnref6">6</a> 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.<a href="#_ftn7" name="_ftnref7">7</a> 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.<a href="#_ftn8" name="_ftnref8">8</a> 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 <a href="javascript:void(0)" class="accordion-cross-reference" id="8795">8795</a> for a discussion of the nondiscrimination requirements applicable to employer-provided health insurance plans. </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 105(e). <a href="#_ftnref2" name="_ftn2">2</a>.  Epmeier v. U.S., 199 F.2d 508, 511 (7th Cir. 1959). <a href="#_ftnref3" name="_ftn3">3</a>.  Andress v. U.S., 198 F. Supp. 371 (N.D. Ohio 1961). <a href="#_ftnref4" name="_ftn4">4</a>.  Niekamp v. U.S., 240 F. Supp. 195 (E.D. Mo. 1965); Pickle v. Comm., TC Memo 1971-304. <a href="#_ftnref5" name="_ftn5">5</a>.  Treas. Reg. § 1.105-5(a). <a href="#_ftnref6" name="_ftn6">6</a>.  Est. 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). <a href="#_ftnref7" name="_ftn7">7</a>.  Treas. Reg. § 1.105-5(a); Andress, 198 F. Supp. 371 (N.D. Ohio 1961). <a href="#_ftnref8" name="_ftn8">8</a>.  IRC § 105(g); Treas. Reg. § 1.105-5(b). </div></div>

June 14, 2024

8804 / How is health insurance coverage taxed for S corporation shareholders?

<div class="Section1">A shareholder-employee who owns more than 2 percent of the outstanding stock or voting power of an S corporation (based on direct ownership as well as attributed ownership) will be treated as a partner, not an employee (see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8803">8803</a> for the rules applicable to partners).<a href="#_ftn1" name="_ftnref1">1</a> Therefore, accident and health insurance premium payments for more-than-2 percent shareholders paid in consideration for services rendered are treated as guaranteed payments made to partners. The result is that an S corporation can deduct premiums under IRC Section 162 and a shareholder-employee must include premium payments in income under IRC Section 61. The shareholder-employee cannot exclude them under IRC Section 106, but may deduct the cost of the premiums to the extent permitted by IRC Section 162(l), as discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8803">8803</a>.<a href="#_ftn2" name="_ftnref2">2</a> The IRS released a CCM clarifying that this remains the case even if the 2-percent shareholder-employee is treated as a 2-percent shareholder via the family attribution rules.<a href="#_ftn3" name="_ftnref3">3</a> <hr> Planning Point: The IRS has released a set of frequently asked questions based upon the regulations governing the new Section 199A deduction for pass-through entities, such as S corporations. The FAQ provides that health insurance premiums paid by the S corporation for a greater-than-2-percent shareholder reduce qualified business income (QBI) at the entity level (by reducing the ordinary income used to calculate QBI). Similarly, when a self-employed individual takes a deduction for health insurance attributable to the trade or business, this will be a deduction in determining QBI and can reduce QBI at the entity and individual levels.<a href="#_ftn4" name="_ftnref4">4</a> <hr> With respect to coverage purchased by an S corporation for employees who do not own any stock and for shareholder-employees who own 2 percent or less of the outstanding stock or voting power, the same rules apply as in any other employer-employee situation. <div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.  IRC § 1372. <a href="#_ftnref2" name="_ftn2">2</a>.  Rev. Rul. 91-26, 1991-1 CB 184. <a href="#_ftnref3" name="_ftn3">3</a>.  CCM 201912001. <a href="#_ftnref4" name="_ftn4">4</a>.  FAQ is available at: https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-provision-11011-section-199a-qualified-business-income-deduction-faqs. </div></div>

March 13, 2024

343 / Are benefits received under a personal health insurance policy taxable income?

<div class="Section1">No.<div class="Section1"> All kinds of benefits from personal health insurance generally are entirely exempt from income tax. This includes disability income; ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="382">382</a>), dismemberment and sight loss benefits; critical illness benefits;<a href="#_ftn1" name="_ftnref1">1</a> and hospital, surgical, or other medical expense reimbursement. There is no limit on the amount of benefits, including the amount of disability income, that can be received tax-free under personally paid health insurance or under an arrangement having the effect of accident or health insurance.<a href="#_ftn2" name="_ftnref2">2</a> At least one court has held, however, that the IRC Section 104(a)(3) exclusion is not available where a taxpayer’s claims for insurance benefits were not made in good faith and were not based on a true illness or injury.<a href="#_ftn3" name="_ftnref3">3</a> The accidental death benefit under a health insurance policy may be tax-exempt to a beneficiary as death proceeds of life insurance ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="65">65</a>).<a href="#_ftn4" name="_ftnref4">4</a> Disability benefits received for loss of income or earning capacity under no fault insurance are excludable from gross income.<a href="#_ftn5" name="_ftnref5">5</a> The exclusion also has been applied to an insured to whom policies were transferred by a professional service corporation in which the insured was the sole stockholder.<a href="#_ftn6" name="_ftnref6">6</a> Health insurance benefits are tax-exempt if received by the insured and if received by a person having an insurable interest in an insured.<a href="#_ftn7" name="_ftnref7">7</a> Medical expense reimbursement benefits must be taken into account in computing a taxpayer’s medical expense deduction. Because only unreimbursed expenses are deductible, the total amount of medical expenses paid during a taxable year must be reduced by the total amount of reimbursements received in that taxable year.<a href="#_ftn8" name="_ftnref8">8</a> Likewise, if medical expenses are deducted in the year they are paid and then reimbursed in a later year, the taxpayer or the taxpayer’s estate, where the deduction is taken on the decedent’s final return but later reimbursed to the taxpayer’s estate, must include the reimbursement, to the extent of the prior year’s deduction, in gross income for the later year.<a href="#_ftn9" name="_ftnref9">9</a> Where the value of a decedent’s right to reimbursement proceeds, which is income in respect of a decedent,<a href="#_ftn10" name="_ftnref10">10</a> is included in the decedent’s estate ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="424">424</a>), an income tax deduction is available for the portion of estate tax attributable to such value. Disability income is not treated as reimbursement for medical expenses and, therefore, does not offset such expenses.<a href="#_ftn11" name="_ftnref11">11</a> <blockquote>Example: Mr. Jones, whose adjusted gross income for 2024 was $25,000, paid $3,000 in medical expenses during that year. On his 2024 return, he took a medical expense deduction of $1,125 [$3,000 – $1,875 (7.5 percent of his adjusted gross income)]. In 2025, Mr. Jones receives the following benefits from his health insurance: disability income, $1,200; reimbursement for 2024 doctor and hospital bills, $400. He must report $400 as taxable income on his 2025 return. Had Mr. Jones received the reimbursement in 2024, his medical expense deduction for that year would have been limited to $725 ($3,000 – $400 [reimbursement] – $1,875 [7.5 percent of adjusted gross income]). Otherwise, he would have received the entire amount of insurance benefits, including the medical expense reimbursement, tax-free.</blockquote> <hr> Planning Point: This example illustrates that the timing of medical expense payments and their submission for reimbursement may be critical to the individual’s personal tax planning, particularly in regard to reaching the requisite 7.5 percent of adjusted gross income threshold. <hr> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.       See, e.g., Let Rul. 200903001. <a href="#_ftnref2" name="_ftn2">2</a>.       IRC § 104(a)(3); Rev. Rul. 55-331, 1955-1 CB 271, modified by Rev. Rul. 68-212, 1968-1 CB 91; Rev. Rul. 70-394, 1970-2 CB 34. <a href="#_ftnref3" name="_ftn3">3</a>.       Dodge v. Commissioner, 93-1 USTC ¶ 50,021 (8th Cir. 1992). <a href="#_ftnref4" name="_ftn4">4</a>.       IRC § 101(a); Treas. Reg. § 1.101-1(a). <a href="#_ftnref5" name="_ftn5">5</a>.       Rev. Rul. 73-155, 1973-1 CB 50. <a href="#_ftnref6" name="_ftn6">6</a>.       Let. Rul. 7751104. <a href="#_ftnref7" name="_ftn7">7</a>.       IRC § 104; Castner Garage, Ltd. v. Commissioner, 43 BTA 1 (1940), acq. 1941-1 CB 11. <a href="#_ftnref8" name="_ftn8">8</a>.       Rev. Rul. 56-18, 1956-1 CB 135. <a href="#_ftnref9" name="_ftn9">9</a>.       Treas. Reg. §§ 1.104-1, 1.213-1(g); Rev. Rul. 78-292, 1978-2 CB 233. <a href="#_ftnref10" name="_ftn10">10</a>.     Rev. Rul. 78-292, 1978-2 CB 233. <a href="#_ftnref11" name="_ftn11">11</a>.     Deming v. Commissioner, 9 TC 383 (1947), acq. 1948-1 CB 1. </div></div>

March 13, 2024

410 / How are funds accumulated in a Health Savings Account (HSA) taxed prior to distribution?

<div class="Section1">An HSA generally is exempt from income tax unless it ceases to be an HSA.<a href="#_ftn1" name="_ftnref1">1</a><div class="Section1"> In addition, rules similar to those applicable to individual retirement arrangements (IRAs) regarding the loss of the income tax exemption for an account where an employee engages in a prohibited transaction<a href="#_ftn2" name="_ftnref2">2</a> and those regarding the effect of pledging an account as security<a href="#_ftn3" name="_ftnref3">3</a> apply to HSAs. Any amounts treated as distributed under these rules will be treated as not used to pay qualified medical expenses ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3649">3649</a>).<a href="#_ftn4" name="_ftnref4">4</a> </div><div class="refs"> <hr align="left" size="1" width="33%"> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 223(e)(1). <a href="#_ftnref2" name="_ftn2">2</a>.     IRC § 408(e)(2). <a href="#_ftnref3" name="_ftn3">3</a>.     IRC § 408(e)(4). <a href="#_ftnref4" name="_ftn4">4</a>.     IRC § 223(e)(2). </div></div>

March 13, 2024

8860 / How does an employer that has a common owner with another employer determine whether it is subject to the ACA shared responsibility provisions?

<div class="Section1">Two or more employers who are controlled by the same owner or are otherwise related are considered to be a single employer if those employers are treated as a single employer under IRC Section 414.<a href="#_ftn1" name="_ftnref1">1</a> IRC Section 414 treats two or more employers as one if they are: (1) part of a controlled group of corporations, (2) trades or businesses that are under common control, (3) affiliated service groups or (4) related through other arrangements generally having the same effect as in groups (1)-(3).<a href="#_ftn2" name="_ftnref2">2</a></div> <div class="Section1"> These employers are combined in determining whether they collectively employ 50 or more full-time employees for purposes of applicable large employer status. If the combined total number of full-time employees exceeds 50 full-time employees (including equivalents), each employer is subject to the shared responsibility provisions even if no single employer crosses the threshold. </div> <div class="refs"> <hr align="left" size="1" width="33%" /> <a href="#_ftnref1" name="_ftn1">1</a>. IRC § 4980H(c)(2)(C)(i). <a href="#_ftnref2" name="_ftn2">2</a>. IRC §§ 414(b), (c), (m), (o). </div>