Employer provided benefits may include, but are not limited to:
- Standard Health Insurance Policies
- Self-Insured Plans
- Accident/Injury Reimbursements
- Flexible Spending Arrangements (FSA)
- Archer MSAs
- Medicare+Choice MSAs
- Qualified Long-Term Care Insurance
An accident or health plan is an arrangement for payments to be made to employees in the event of personal injuries or sickness. A plan must meet certain requirements and provide benefits for employees. It can also provide benefits to retired employees and beneficiaries of employees.
What Benefits Qualify
The plan can take the form of employer-furnished insurance, direct reimbursement of medical expenses, or a flexible spending arrangement (FSA) under which employers permit employees to set aside amounts on a pre-tax basis to be used for medical expenses. Employer contributions to an employee’s Archer medical savings account (MSA) are treated as employer-provided coverage under a health plan, as well as employer contributions to a Medicare+Choice MSA, and are not included in taxable income. An employer plan providing coverage under a qualified long-term care insurance contract is treated as an accident and health plan.
Must Benefit Employees
A health or accident plan must be provided for the benefit of employees to receive favorable tax treatment. Favorable tax treatment means that employer-provided coverage is not included in the taxable income of the employee, but is a deductible expense for the employer.
For this purpose, employees include current and retired employees, their spouses and dependents. The definition of employees also has been ruled to include laid-off employees under a collective bargaining agreement, surviving spouses of employees, and activated military reservists. The reasoning is that the coverage arises out of the employment relationship. Generally, unmarried domestic partners do not fall within this definition.
The IRS has privately ruled that unmarried domestic partners of an employee are not treated as spouses and the value of benefits provided to them may be treated as taxable to the employee, unless they qualify as dependents.
When coverage is provided to shareholder-employees, it must be determined whether it is provided because of their status as shareholders or as employees. The determination is made on the basis of the facts and circumstances in each case. For example, an attorney set up a medical plan for his wholly-owned professional corporation, and the requirements for coverage were established so that he was the only employee covered by the plan. The court concluded that the purpose of the plan was to benefit the attorney as a stockholder rather than as an employee. Factors that are considered in making the decision include whether the plan does or does not cover nonshareholders or nonemployees and whether it creates a likelihood of benefits to shareholders that are not in proportion to their ownership ratio.
What is a Plan?
The plan requirement is informal, but has to be an arrangement for the payment of amounts in the event of personal injuries or sickness. It can cover one or more employees, and different plans can be provided for different employees. The plan does not have to be in writing; however, the fact that the employees are not notified of the plan is evidence that no plan exists.
Types of Employer-Provided Health Benefits
Employers may contribute to accident or health plans in different ways. The employer may pay the premium on an accident or health insurance policy or contribute to a separate fund that provides benefits directly (self insurance). The employer may reimburse employees who are not covered by group insurance for all or part of the expense of their own policies.
An employer using any of these methods may pay the full cost of the coverage, or the employee may be required to make contributions. The employer may reimburse employees who are not covered by group accident and health insurance but who carry their own policies.
If the employer requires proof that the employee has already paid the policy premium before making the reimbursement, the employee is treated as an agent of the employer making contributions to an accident and health plan. The employee then is not taxed on the reimbursement. If the employer does not require proof that the employee is making the premium payments, the employee is required to include the reimbursements in income.
As an alternative, the employer may provide health or accident coverage through a flexible spending arrangement (FSA) under which employees contribute amounts on a pre-tax basis to an account and then receive reimbursements for health or accident expenses. These accounts must meet additional requirements to qualify as accident or health plans.
CAVEAT: An employer contribution to an Archer MSA made through a cafeteria plan is not excludable from gross income. Long-term care insurance coverage provided under a cafeteria plan or FSA is not excludable from gross income.
CAVEAT: Self-insured medical reimbursements plans are subject to nondiscrimination rules. They cannot discriminate in favor of highly compensated individuals in eligibility to participate or benefits provided. Insured plans other than self-insured plans are not subject to the nondiscrimination rules. Insured plans include medical expense reimbursements provided under an individual or group policy of accident or health insurance issued by a licensed insurance company or a prepaid health care plan such as an HMO.
For more information regarding this topic or any other tax-related issue, please contact Henssler Financial at 770-429-9166 or [email protected].