My employer does not provide health insurance. I have my own health insurance policy for myself and my spouse. My employer reimburses me for 1/2 of my health insurance cost. Is this reimbursement taxable income to me on my federal tax return?

asked 19 Feb '11, 03:57

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Chris 1
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edited 19 Feb '11, 18:56

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Bill-EA
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Health insurance is the most widespread employee benefit in the U.S. Generally, the entire cost is deductible to employers, but nothing is includable in employees' taxable income as a result of a payment of plan benefits -- if the plan meets certain rules. This would be called a postpaid plan or self-funded plan, which can reimburse employees for payments to health care providers.

The employee does not have taxable income when:

1.) the employer pays insurance premiums

2.) when benefits are paid, or

3.) when the plan reimburses the employee for covered expenses

UNLESS the employee is considered highly compensated and the plan is a discriminatory non-insured medical expense reimbursement plan.

Highly compensated individuals are:

a.) the five highest paid officers of the employer;

b.) shareholders who own at least 10 percent (by value) of the employer's stock; and

c.) individuals who are among the highest paid 25 percent of all employees, other than 10 percent shareholders who are not participants.

A plan is treated as discriminating as to eligibility unless:

  • It benefits 70 percent or more of all employees;

  • If 70 percent or more of all employees are eligible to participate, 80 percent of all employees eligible to participate actually participate; or

  • An eligibility pattern set up by the employer is found by the IRS to be nondiscriminatory.

Whether an eligibility pattern is nondiscriminatory is determined based on all facts and circumstances.

See IRC 105, 106.

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answered 19 Feb '11, 18:56

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Bill-EA
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Bill is correct - but a couple of additional comments --

The employer must have a plan to reimburse you for the cost of health insurance - the plan does not have to be in writing. You cannot have the option to receive cash instead of health insurance unless your employer has a Section 125 (cafeteria) plan in place (which must be in writing) - then any cash you receive instead of the benefit is taxable wages and should be included in your W-2. This means that you must actually have health insurance and your out of pocket cost must be at least the amount your employer is reimbursing.

In your case, your employer is paying half your out of pocket cost. But suppose your employer pays you $500 per month for heath insurance, but your cost is only $400 per month. The entire $500 is taxable income to you and should be included in your W-2. Or, if you are covered on your spouse's employer's policy and your spouse pays $500 per month pre-tax (under the spouse's employer's Section 125 plan) - you have no after tax cost, so the entire $500 is taxable income and should be included in your W-2.

If the reimbursement qualifies for exclusion from your income, which it looks like it does based on the information you provided, yyou may not use the portion of your cost that is reimbursed as a medical expense deduction on Sch A because it was not included in your income. If you otherwise qualify, you can deduct the amount that was not reimbursed.

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answered 20 Feb '11, 17:11

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Pat Haggerty
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Very clear and concise follow-up to Bill's answer Pat... first and foremost, there must be a reimbursement plan in place. Also, you make a very important point about Schedule A. Many list/claim such medical expenses incorrectly without taking into account the fact that the reimbursement was excluded from income.

(20 Feb '11, 20:50) Kristy M. W.

So to simplify the above answers... taxable if the employee is receiving a Health Insurance benefit. NOT taxable if the employee is being reimbursed for an already incurred Health Insurance expense.

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answered 22 Jul '13, 00:33

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ypngdevelopment
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Sorry but I find this confusing. Can someone please help with my situation? I work part-time (35 hours / week) for a company that provides health insurance to full-time employees. They agreed to reimburse me for Medicare premiums (significantly less than they would pay for my coverage under the company plan) but insist that it be reported as taxable income on a 1099. They think that if they pay the Feds directly it need not be reported (a moot distinction IMO).

I disagree that this qualifies as taxable income. Any help is very much appreciated.

Wendy B.

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answered 15 Dec '13, 19:31

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Asked: 19 Feb '11, 03:57

Seen: 31,374 times

Last updated: 15 Dec '13, 19:31