Employer Provided 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">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">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">Premiums for non-medical care, such as personal disability income coverage, are not deductible.<a href="#_ftn1" name="_ftnref1">¹</a> Only premiums for medical care insurance are deductible as a medical expense ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="342">342</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="487">487</a>).<div class="Section1"><br /> <br /> A deduction is allowed for medical care that is not otherwise compensated for by insurance. The deduction is allowed to the extent that the medical care expenses exceed 7.5 percent of the taxpayer&rsquo;s adjusted gross income. The 10 percent limit was permanently reduced to 7.5 percent in 2020. The threshold is 7.5 percent for the alternative minimum tax.<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; IRC &sect; 213(d)(1).<br /> <br /> </div></div><br />

<div class="Section1">Under the Affordable Care Act (ACA), the exclusion from gross income for amounts expended on medical care ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8789">8789</a>) is expanded to include employer provided health coverage for any adult child of the taxpayer if the adult child has not attained the age of 27 as of the end of the taxable year. According to Notice 2010-38, the adult child does not have to be eligible to be claimed as a dependent for tax purposes for this income exclusion to apply.<a href="#_ftn1" name="_ftnref1">¹</a><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(b), as amended by the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010. Notice 2010-38, 2010-20 IRB 682.<br /> <br /> </div></div><br />

<div class="Section1">Disability payments from a qualified plan receive different tax treatment, depending on whether the payments are made to common law employees (<em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="384">384</a>) or to self-employed individuals.<div class="Section1"><br /> <br /> If a self-employed individual draws benefits from a plan because of permanent disability, the disability payments will be taxed under the same rules that apply to retirement benefits ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3969">3969</a>).<br /> <br /> If a self-employed individual receives disability payments through health insurance, the employee may exclude from gross income any amounts attributable to nondeductible contributions as a self-employed person.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Where contributions under a qualified plan are applied to provide incidental accident and health insurance for a self-employed individual, the insurance is treated as if the employee had purchased it directly from the insurance company.<a href="#_ftn2" name="_ftnref2">²</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; IRC &sect;&sect; 105(g), 104(a)(3); Treas. Reg. &sect;&sect; 1.105-1(a), 1.105-5(b).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.72-15(g).<br /> <br /> </div></div><br />

<div class="Section1">Much like a traditional IRC Section&nbsp;529 college savings plan, ABLE account distributions must be used to fund certain specified expenses of the disabled beneficiary or will become subject to a 10 percent penalty tax. In addition to the 10 percent penalty, any distributed earnings are taxed at the individual&rsquo;s normal income tax rate if the distribution is not used for qualified expenses.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> The range of qualified expenses is broad, and includes &ldquo;expenses related to the individual&rsquo;s disability,&rdquo; such as expenses for health care, housing, transportation, job training, assistive technology, personal support, financial management, legal fees and related services and expenses.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Individuals are generally limited to establishing only one ABLE account. Amounts initially contributed to an ABLE account can be rolled over into another ABLE account established either for the same beneficiary, or for a sibling of that beneficiary who also meets the eligibility requirements discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="386">386</a>. <em>See</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="388">388</a> for a discussion of changes to the contribution limits and rollover rules that impact ABLE accounts under the 2017 tax reform law.<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; H.R. 647, &sect; 102.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; H.R. 647, &sect; 102.<br /> <br /> </div></div><br />

<div class="Section1">Employers or former employers must withhold tax from payments made to an employee for a period of absence from work due to injury or sickness. If an employer has shifted the insurance risk to an insurer or trust, no income tax need be withheld from wage continuation payments that an insurance company or a separate trust makes on behalf of the employer.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> Amounts paid as sick pay during a temporary absence under a plan to which the employer is a party may be withheld by a third party payor at the employee’s request.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Amounts paid by a third party are wages subject to mandatory withholding if the insurance risk is not shifted by the arrangement because the third party is acting as the employer’s agent if the employer reimburses the insurance company or trust on a cost plus fee basis.<a href="#_ftn3" name="_ftnref3">³</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. § 31.3401(a)-1(b)(8); Rev. Rul. 77-89, 1977-1 CB 300.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     IRC § 3402(o); Treas. Reg. § 31.3402(o)-3.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.     Treas. Reg. § 31.3401(a)-1(b)(8).<br /> <br /> </div>

<div class="Section1">The amount of any COBRA premium reduction taken under the special rules enacted in 2009 and 2010 (<em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="357">357</a> and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="358">358</a>) was excluded from an individual&rsquo;s gross income.<a href="#_ftn1" name="_ftnref1">¹</a> If the premium reduction was provided with respect to any COBRA continuation coverage that covered an individual, the individual&rsquo;s spouse, or the individual&rsquo;s dependent, and the individual&rsquo;s modified adjusted gross income, that is, the adjusted gross income plus amounts excluded under IRC Sections 911, 931, or 933, exceeded $145,000, or $290,000 for married couples filing jointly, then the amount of the premium reduction was recaptured as an increase in the individual&rsquo;s federal income tax liability.<a href="#_ftn2" name="_ftnref2">²</a> The recapture was phased in for individuals with a modified adjusted gross income in excess of $125,000, or $250,000 for married couples filing jointly.<a href="#_ftn3" name="_ftnref3">³</a> An individual was able to elect to permanently waive the right to the premium reduction, for example, to avoid receiving and then repaying the premium reduction.<a href="#_ftn4" name="_ftnref4">⁴</a><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; 139C, as added by ARRA 2009. <em>See also</em> Notice 2009-27, 2009-16 IRB 838, 839.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>See</em> &sect; 3001(b)(1), ARRA 2009. <em>See also</em> Notice 2009-27, 2009-16 IRB 838, 839.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>See</em> &sect; 3001(b)(2), ARRA 2009. <em>See also</em> Notice 2009-27, 2009-16 IRB 838, 839.<br /> <br /> <a href="#_ftnref4" name="_ftn4">4</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>See</em> &sect; 3001(b)(3), ARRA 2009<em>. See also</em> Notice 2009-27, 2009-16 IRB 838, 839.<br /> <br /> </div></div><br />

<div class="Section1">A covered employee is any individual who is or was provided coverage under a group health plan by virtue of the individual’s performance of services for one or more persons maintaining the plan, including as an employee defined in IRC Section 401(c)(1), or because of membership in an employee organization that maintains the plan.<a href="#_ftn1" name="_ftnref1">¹</a></div><br /> <div class="Section1"><br /> <br /> In addition, the following persons are employees if their relationship to the employer maintaining the plan makes them eligible to be covered under the plan: self-employed individuals, independent contractors and their agents and independent contractors, and corporate directors.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> A person eligible for coverage but not actually covered is not a covered employee.<br /> <br /> Final COBRA regulations introduce the term similarly situated non-COBRA beneficiaries, defined as a group of covered employees, their spouses, or their dependent children receiving coverage under an employer’s or employee organization’s group health plan for a reason other than the rights provided under the COBRA requirements and who most similarly are situated to the qualified beneficiary just before the qualifying event, based on all the facts and circumstances.<a href="#_ftn3" name="_ftnref3">³</a> COBRA beneficiaries are accorded the same rights and coverage as similarly situated non-COBRA beneficiaries.<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 § 4980B(f)(7); Treas. Reg. § 54.4980B-3, A-2.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     Treas. Reg. § 54.4980B-3, A-2.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.     Treas. Reg. § 54.4980B-3, A-3.<br /> <br /> </div>