Employer reimburses employee for health insurance payment that employee pays. Still tax free benefit to employee?

[Colmatt]

New job so employer not willing to put employee on insurance for 6 months but has agreed to reimburse him monthly until then. Employer reimburses employee for health insurance payment that employee pays. Still tax free benefit to employee?

[TaxGuyBill · Accepted solution]

Yes, it should be tax free to the employee.

However, whether or not this arrangement is ACA compliant for the employer is another matter.  It is quite possible it is not, which could subject the employer to gigantic penalties.

[itonewbie]

Excludable from taxable wages under §106(a) provided it is an accountable reimbursement and encashment is not an option.

It was also clarified that this type of arrangement is not ACA-compliant and may, therefore, be subject to substantial excise tax.

[TaxGuyBill]

It is possible it would qualify under the Small Employer HRA.  However,  I suspect the employer does not have that.

[itonewbie]

Hmmm, but (1) this sounds like an ad-hoc arrangement with one employee and not a plan and (2) I recall that ACA does not allow employers to integrate individual market policies to comply with the market reform provisions even if the fund were to come from an HRA.

[TaxGuyBill]

(1)  I agree.
(2)  It is only allowed in connection with a "Small Employer HRA" at §9831(d).  HOWEVER, I was wrong --  there is no way this employer would qualify for a Small Employer HRA.  One of the requirements of a Small Employer HRA is that they don't have a 'group' health insurance policy (besides the Small Employer HRA), so this employer would not qualify.

[itonewbie]

Thanks for sharing, happy guy! :smile: :+1:

[Colmatt]

Thank you everyone.  It appears from your answers that this will not be tax free benefit to this new employee unless it is paid under a formal medical plan.  Not to mention the penalties the employer may be hit with.  So if the only option here is to include it in wages, this employee will need to calculate what wage increase he'll need to cover his monthly expense.  Sound right?

Happy Thanksgiving everyone, and thanks again.

[TaxGuyBill]

No.

It likely WOULD be tax free to the employee, but the employer would be subject to gigantic penalties.

No, the amount of insurance CAN'T be added to wages unless it actually *IS* wages, or else the employer is subject to gigantic penalties.  In other words, the amount of wages can't have anything to do with the cost of health insurance.  If the employer decides to give a permanent larger wage, that must be independent of health insurance.  It can't be a temporary wage increase or any any other way be associated with paying for health insurance.

[itonewbie]

Exactly! Accountable reimbursement for the premium with no option for encashment should be nontaxable.

[sjrcpa]

I learned a new word today. Encash

[Colmatt]

Suggestions then?

[TaxGuyBill]

These are the options that I can think of:

(1) Ask employer to change the 6 month policy and insure him now.
(2) Ask employer to give permanent wage increase.
(3) Employee pays for non-employer insurance, with no employer payment.

[rbynaker]

Just shooting from the hip but I don't know that there has to be a permanent wage increase.  Just that the wage increase cannot be tied to (contingent upon, etc.) health insurance.  So if the employee is paying $500/month for insurance, strike a deal where the employer pays a monthly signing bonus of $750/month for the first six months.  Depending on tax brackets that may net about $500/month after taxes.  The employee can do whatever they want to with the money (such as pay their health insurance premiums, put it toward a new boat, hookers and blow, etc.)  The key IMO is that the payment cannot be tied to the insurance premium amount (or even to a requirement to maintain insurance).

That said, this is not a tax-friendly solution for either party so I'd look harder at other options.

Rick

[TAXOH]

Lol on the hookers and blow.

[TaxGuyBill]

To me, a temporary wage increase ties it to the health insurance, which can't be done.

However, a signing bonus is a good idea.

[rbynaker]

I agree, if it walks and talks like a duck, you can't just put a chicken suit on it and call it a chicken.  The challenge is to get it to stop quacking and start clucking.

It's like when a new client starts a hobbyish business.  I like to use the Regs as a checklist.  Do you have a business plan?  No?  There's still time, go make one.  Do you have a business bank account?  No?  There's still time, go open one.  Start using some business software, have some sort of plan/system in place to evaluate profitability and make changes to the business operations if you find you're losing money, etc.  So many of these hobby loss cases are lost on criteria that are very easy to meet.  You don't have to be good at it, but you do have to behave like a business.

Rick

[itonewbie]

My worry is that whether retroactive changes to a fully executed employment agreement at this point would pass muster and substituting the reimbursement for other types of payment now could be taken as form over substance.

Any change should be considered in conjunction with §4980D(c) which provides that the excise tax may not apply so long as certain conditions are met and that the correction is made within a narrow window.  This must also overcome the hurdle of reasonable cause and willful neglect which could prove challenging.

[rbynaker]

Good point, we have no idea what stage of compensation negotiation we're in. 🙂  I agree we can't rewrite history.

[itonewbie]

:smile: :+1:

[itonewbie]

"I learned a new word today. Encash"
@sjrcpa Easier to say than given option to receive in cash...