Health Insurance

<div class="Section1"><br /> <br /> Nondiscrimination requirements apply to self-insured health benefits, although the IRS announced in Notice 2011-1 on December&nbsp;22, 2010, that compliance with nondiscrimination rules for health insurance plans will be delayed until regulations or other administrative guidance has been issued. This guidance remains pending. The IRS indicated that the guidance will not apply until plan years beginning in specified periods after guidance is issued. Some plans will be grandfathered.<br /> <br /> Benefits under a self-insured plan generally are excludable from an employee&rsquo;s gross income ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8794">8794</a>). 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 highly compensated individuals are taxable to them.<br /> <br /> A self-insured plan is one in which reimbursement of medical expenses is not provided under a policy of accident and health insurance.<a href="#_ftn1" name="_ftnref1">¹</a> According to regulations, a plan underwritten by a cost-plus policy or a policy that, in effect, merely provides administrative or bookkeeping services is considered self-insured.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> A medical expense reimbursement plan cannot be implemented retroactively. To allow this would render meaningless the nondiscrimination requirements of IRC Section&nbsp;105.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> A self-insured plan may not discriminate in favor of highly compensated individuals either with respect to eligibility to participate (<em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="338">338</a>) or benefits (<em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="339">339</a>).<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 105(h)(6).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.105-11(b).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Wollenburg v. U.S.</em>, 75 F. Supp.&nbsp;2d 1032 (D.C Neb. 1999); <em>American Family Mut. Ins. Co. v. U.S.</em>, 815 F. Supp.&nbsp;1206 (W.D. Wis. 1992). <em>See also</em> Rev. Rul. 2002-58, 2002-38 IRB 541.<br /> <br /> </div></div><br />

<div class="Section1">Section 9003 of the ACA adds IRC Section 106(f), which revises the definition of medical expenses for employer-provided accident and health plans, including health flexible spending arrangements (health FSAs) and health reimbursement arrangements (HRAs). Section 9003 also revises the definition of qualified medical expenses for health savings accounts and Archer medical savings accounts.</div><br /> <div class="Section1"><br /> <br /> Prior to 2020, over-the-counter drugs were not eligible for reimbursement by these plans unless a physician issued a prescription. The requirement was removed in 2020. Prior to that, for example, if a physician were to prescribe aspirin, this expense could be reimbursed but the purchase of aspirin without a prescription could not be reimbursed.<br /> <br /> Other changes in health FSAs and HRAs are discussed in the following Q&amp;As.<br /> <br /> </div>

<div class="Section1">HSA law provides special treatment for spouses in the following areas:<br /> <blockquote><strong>Tax-Free Distributions.</strong> An HSA owner can use his or her HSA tax-free to pay the qualified medical expenses of spouses. This benefit does not extend to domestic partners (in limited circumstances a domestic partner could be a tax dependent and an HSA owner can use an HSA for a tax dependent).<br /> <br /> <strong>Beneficiary Treatment.</strong> A spouse beneficiary can treat the HSA as his or her own upon the death of the HSA owner. Non-spouse beneficiaries must take a full distribution of the money remaining in the HSA.<br /> <br /> <strong>Divorce Transfer.</strong> An HSA owner can transfer assets into an HSA of former spouse in the case of a divorce.<br /> <br /> <strong>Estate Tax Treatment.</strong> If a spouse is named as the beneficiary of the HSA, the treatment of the HSA may change for estate tax purposes.<br /> <br /> <strong>Family HDHP Treatment.</strong> Spouses covered under a family HDHP are capped at the combined HSA family limit. Also, if one spouse has a family HDHP, then both spouses are deemed to have family HDHPs. This rule closes a loophole that allowed each partner in a same-sex couple to contribute the family HSA maximum in certain circumstances.<br /> <br /> <strong>Child of Former Spouse.</strong> An HSA owner can use the HSA to pay for medical expenses of his or her child that is claimed as a tax dependent by a former spouse (this is helpful in cases of divorce and legal separation).</blockquote><br /> </div>

<div class="Section1">It is not considered a COBRA qualifying event if an employer stops making contributions to a multiemployer plan. Further, when an employer stops making contributions to a multiemployer group health plan, the plan continues to be obligated to make COBRA continuation coverage available to qualified beneficiaries associated with the employer. Once the employer provides group health insurance to a significant number of employees who were formerly covered under the multiemployer plan or starts contributing to another multiemployer plan, the employer’s plan or the new multiemployer plan must assume the COBRA obligation.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> If, however, the employer that stops contributing to the multiemployer plan makes group health plan coverage available to (or starts contributing to another multiemployer plan that is a group health plan) a class of the employer’s employees formerly covered under the multiemployer plan, the plan maintained by the employer (or the other multiemployer plan), from that date forward, has the obligation to make COBRA continuation coverage available to any qualified beneficiary who was receiving coverage under the multiemployer plan on the day before the cessation of contributions. The qualifying event must have occurred in connection with a covered employee whose last employment prior to the qualifying event was with the employer.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Treas. Reg. § 54.4980B-9, A-10.<br /> <br /> </div>

<div class="Section1">Yes. The IRS has ruled that premiums paid on an overhead expense disability policy, a special type of contract that reimburses professionals or owner-operators for overhead expenses actually incurred during periods of disability, are deductible as a business expense and the proceeds are taxable.<a href="#_ftn1" name="_ftnref1">¹</a> The ruling relates to self-employed individuals.<div class="Section1"><br /> <br /> Premiums paid on standard personal disability insurance are not deductible as a business expense but the proceeds are tax-exempt as compensation for personal injuries or sickness ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="382">382</a>).<a href="#_ftn2" name="_ftnref2">²</a> This is true even though a taxpayer intends to use the benefits to pay overhead expenses during periods of disability.<a href="#_ftn3" name="_ftnref3">³</a> (<em>See</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="377">377</a>.)<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 55-264, 1955-1 CB 11.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 55-331, 1955-1 CB 271; Rev. Rul. 70-394, 1970-2 CB 34.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 58-480, 1958-2 CB 62; <em>Blaess v. Commissioner</em>, 28 TC 710 (1957); <em>Andrews v. Commissioner</em>, TC Memo 1970-32.<br /> <br /> </div></div><br />

<div class="Section1">No. An employer cannot sponsor a stand-alone health FSA. An employer may only offer a health FSA if it also offers a major medical plan to the health FSA participants, who are not required to accept the offer of coverage in the employer’s major medical plan.</div>

<div class="Section1">For amounts paid after December 31, 2010 and before 2020, a distribution from an HSA or Archer MSA<a href="#_ftn1" name="_ftnref1">¹</a> for a medicine or drug was a tax-free qualified medical expense only if the medicine or drug (1) required a prescription, (2) was an over-the-counter medicine or drug and the individual obtained a prescription, or (3) was insulin. The prescription requirement for over-the-counter drugs was eliminated beginning in 2020.</div><br /> <div class="Section1"><br /> <br /> If amounts are distributed from an HSA or Archer MSA for any medicine or drug that does not satisfy these requirements, the amounts are distributions for nonqualified medical expenses, which are includable in gross income and generally are subject to a 20 percent additional tax. This change does not affect HSA or Archer MSA distributions for medicines or drugs made before January 1, 2011, nor does it affect distributions made after December 31, 2010, for medicines or drugs purchased on or before that date.<br /> <br /> IRS guidance reflecting these statutory changes makes it clear that the rules in IRC Sections 106(f), 223(d)(2)(A), and 220(d)(2)(A) do not apply to items that are not medicines or drugs, including equipment such as crutches, supplies such as bandages, and diagnostic devices such as blood sugar test kits. These items may qualify as medical care if they otherwise meet the definition of medical care in IRC Section 213(d)(1), which includes expenses for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body.<br /> <br /> Expenses for items that are merely beneficial to the general health of an individual, such as expenditures for a vacation, are not expenses for medical care.<br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     IRC § 223(d)(2)(A), IRC § 220(d)(2)(A).<br /> <br /> </div>

<div class="Section1"><br /> <br /> Yes. A qualified profit sharing plan may provide health insurance benefits for its employee-participants within limits ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3830">3830</a>). A qualified pension plan may provide disability pensions, but will not qualify if it provides regular health insurance benefits for active employees. A qualified pension plan may provide health insurance benefits for retired employees ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3830">3830</a>). For tax consequences to employees, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="394">394</a>&nbsp;and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3941">3941</a>.<br /> <br /> </div><br />

<div class="Section1">An employer generally can deduct all premiums paid for disability income coverage for one or more employees as a business expense.</div><br /> <div class="Section1"><br /> <br /> Premiums are deductible by an employer whether coverage is provided under a group policy or under individual policies. The deduction is allowable only if benefits are payable to employees or their beneficiaries; it is not allowable if benefits are payable to an employer.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> The deduction of premiums paid for a disability income policy insuring an employee-shareholder was prohibited where the corporation was the premium payor, owner, and beneficiary of the policy. The Tax Court held that IRC Section 265(a) prevented the deduction because the premiums were funds expended to produce tax-exempt income. The Tax Court stated that disability income policy benefits, had any been paid, would have been tax-exempt under IRC Section 104(a)(3).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Treas. Reg. § 1.162-10(a); Rev. Rul. 58-90, 1958-1 CB 88; Rev. Rul. 56-632, 1956-2 CB 101.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     <em>Rugby Prod. Ltd. v. Commissioner</em>, 100 TC 531 (1993). <em>See</em> Rev. Rul. 66-262, 1966-2 CB 105.<br /> <br /> </div>

<div class="Section1">For tax years beginning after December 31, 2010, health care reform originally required that employers disclose the value of benefits provided for each employee’s health insurance coverage on employee W-2 forms. This reporting was to give the federal government statistical information and did not change the income tax treatment for employers or employees.</div><br /> <div class="Section1"><br /> <br /> The required reporting rules were delayed twice. Health care reform required W-2s for the 2011 year to provide the cost of health coverage. That requirement was delayed and made applicable for W-2s issued for the 2012 year. Additionally, IRS Notice 2011-28 (as modified by Notice 2012-9) provides an exemption for this delayed reporting requirement. Until further notice from the IRS, an employer is not subject to the reporting requirement for any calendar year if the employer was required to file fewer than 250 Forms W-2 for the preceding calendar year. The IRS has advised that any guidance expanding the reporting requirements will apply to calendar years that begin at least six months after the date that such guidance is issued.<br /> <br /> <hr /><br /> <br /> <strong>Planning Point:</strong> If employees talk to one another, the new W-2 reporting may mean that employees can discover that their employer pays nothing for some employees and thousands for others, especially in grandfathered plans that are not subject to nondiscrimination rules so long as they retain their grandfathered status. It has been quite common for small employers to provide family coverage for owners and key employees, to provide single employee coverage often with less than 100 percent of cost for other employees, and to exclude employees who have health insurance through another source, such as a spouse’s employment.<br /> <br /> <hr /><br /> <br /> </div>