IRS Guidance on Employer Reimbursement of Individual Health Insurance Premiums

The IRS has issued guidance on a longstanding gray area in the benefits world- reimbursing employees for the cost of their individual health insurance plans.  Please go here for that guidance.

For years, many small employers not offering employer-based group health plans have reimbursed employees for the cost of their individual health insurance premiums through Health Reimbursement Arrangements (HRA).  The employer was often deducting these reimbursements as expenses, and the employees enjoyed tax-free treatment of premiums.  Recent IRS Guidance driven by Affordable Care Act legislation explains that individual health coverage is not considered the same as employer-based group health plans and cannot be linked to an HRA or cafeteria plan.

The IRS has made clear now that there are no workarounds to this rule.  Unless an employer-sponsored group health plan is offered, the employer shouldn’t implement an HRA that un-taxes these premiums.  If the boss feels it’s important to help staff with their health insurance premiums, the only appropriate way to do it is to give the employee a pay raise.  This adds additional payroll tax for the employer and income taxes for the receiving employee, but it’s the only available path that keeps everyone clear of audits, penalties and the related hassles.

For analysis, situation-specific questions and greater detail on this rule, please contact your CPA or tax advisor.

Updated: 02/19/16

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About Kevin Guss

Kevin J. Guss is a Consultant with our Private Client Benefit Services, specializing in providing individual health coverage (on and off-exchange), Medicare supplements, life, LTC and disability insurance to clients of J.W. Terrill and strategic partners. With more than 22 years of industry experience, Kevin counts many retired professional athletes, celebrities, business leaders and prominent members of the community among his clients. He has a Group Benefits Associate designation from the Wharton School of the University of Pennsylvania, a Past President of St Louis Association of Health Underwriters and a current board member of the MO Association of Health Underwriters.

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