Are employee contributions to health insurance taxable

Valuation of benefits

1. Overview
2. Rule for calculating benefit value
3. Subscriptions or other payments for employees
4. Payment of medical insurance for employees
5. Goods and assets provided to employees
6. Vouchers provided to employees
7. Small Benefit Exemption
8. Specific valuation rules

You might pay medical insurance premiums on behalf of an employee. This is a taxable benefit for your employee. 

When you pay medical insurance premiums on behalf of an employee, you pay a reduced premium to the authorised insurer. The insurer will have applied Medical Insurance Relief, given as Tax Relief at Source (TRS), to the gross amount. You will need to return, to Revenue, the value of the Medical Insurance Relief. 

The value of the benefit, to your employee, is the gross value of the insurance premium. You must add this gross value, as notional pay, to your employee’s pay to deduct:

• Income Tax (IT)
• Pay Related Social Insurance (PRSI)
• Universal Social Charge (USC).

How to return the value of Medical Insurance Relief

Generally, you must pay the value of any Medical Insurance Relief to the TRS section in the Collector-General's Division. 

You must pay the amount of relief to Revenue as:

• part of your Corporation Tax (CT) preliminary tax payment, if you are registered for CT and account for this in your CT1 form
• part of your IT preliminary tax payment, if you are currently registered for IT and account for this in your Form 11
• a cheque or bank draft if you are not registered for IT or CT
• cheque or bank draft if you are non-resident.

You may claim a deduction for the gross value of the policy paid for Case I or Case II purposes.

• Example

  You own a motor dealership. You pay your employee’s medical insurance policy of €800 (€1,000 less tax relief of €200). You must deduct IT, PRSI and USC on the gross amount, €1,000, from your employee's pay.

  This employee is entitled to a tax credit for the gross premium (€1,000 @ 20%) in their Tax Credit Certificate.

  You must pay the Colletor-General's Division, the €200 you obtained as tax relief when you paid the medical insurance.

Payment of medical insurance where employer is an insurer

You do not need to pay the value of any Medical Insurance Relief to Revenue if you are:

• a medical or dental insurer
• a tied agent of a medical or dental insurer
• an employer connected to a medical or dental insurer or a tied agent. (If you are unsure if you are connected, please contact your Revenue office for further assistance.)

You may not claim a deduction for the gross value of the policy for Case I or Case II purposes. Instead, you may claim a deduction for any administrative costs incurred in providing a medical insurance policy for your employees.

Tied agent

In this scenario, a tied agent refers to any insurance agent who has entered into an agreement with a medical or dental insurer. The agreement either prevents or severely restricts their ability to sell medical or dental insurance policies offered by other medical or dental insurers.

Next: Goods and assets provided to employees

Published on October 25, 2022.

When reimbursing employees for their health insurance expenses, there are many options to choose from. Due to the rising cost of health insurance, many employers are switching from traditional employer-sponsored group health insurance to more personalized benefits.

Benefit reimbursements are a great way to save organizations money on healthcare expenses and provide employees with a more personalized benefits package. However, some health insurance reimbursements are taxable while others aren't.

With so many different options, it can be hard to know which health insurance reimbursements are taxable and which aren't.

This article will cover two of the most popular types of healthcare reimbursements: health reimbursement arrangements (HRAs) and health stipends. We'll explore which benefits are tax-free and which count as taxable income.

Want to provide a tax-free healthcare benefit for medical expenses and premium reimbursements? Learn more about HRAs with our complete guide

Is an HRA reimbursement taxable?

Under Internal Revenue Service (IRS) rules1, employers can reimburse their employees for health insurance and qualifying medical expenses in a tax-advantaged way. The most prominent vehicle for doing so is an HRA.

When an HRA complies with federal rules, employers can reimburse medical expenses, such as health insurance premiums, with money free of payroll taxes for both the employer and employee. An HRA may also be free of income tax for the employee if they have individual health insurance that provides minimum essential coverage (MEC).

To get the tax benefits of this health plan, however, an HRA must follow IRS procedures, including strict rules about setting up formal plan documents.

HRA requirements

The IRS has clear rules governing how HRAs work and how employers must set them up to comply.

To get the tax relief benefits, an HRA must meet the following requirements:

• It must be 100% employer-funded (employees can't contribute)
• Even if the employee agrees to it, the organization can't fund its contribution through wage deductions
• Employees must have MEC to get reimbursements free of income tax
  • If employees don't have MEC, they must report reimbursements as taxable income at the end of the year
• Formal plan documents must define qualified medical expenses

Certain types of HRAs, like the qualified small employer HRA (QSEHRA), have annual contribution limits, while others don’t, like the individual coverage HRA (ICHRA) and the group coverage HRA (GCHRA).

HRA compliance

To be compliant, healthcare reimbursement plans must have formal plan documents that describe how the plan is managed, what medical expenses are reimbursable, and what documents are required to demonstrate compliance.

If an employer doesn't want to set up compliant documents and procedures to receive these pre-tax benefits, they can just give employees a raise or a health insurance benefit stipend. However, the organization will pay payroll tax on these extra wages, and employees will pay payroll and income tax.

How does an HRA work?

Employees can purchase individual health insurance coverage from the federal or state marketplace with an HRA. Employees pay for their own health expenses and premium costs upfront and request reimbursement for them.

Employers set monthly allowance caps for reimbursement and design their plans to reflect which expenses they want to be eligible for reimbursement, such as healthcare premiums only or all eligible expenses.

Once employees submit proof of their medical bills and other qualifying expenses, they are reimbursed up to their available allowance.

This makes an HRA an incredibly flexible and personalized benefits option.

Three of the most popular types of HRAs are:

• The qualified small employer HRA (QSEHRA): A great option for organizations with less than 50 full-time equivalent employees (FTEs). The IRS caps annual employer contributions.
• The individual coverage HRA (ICHRA): Available to organizations of all sizes, an ICHRA allows for customization across different employee classes such as full-time employees, salaried workers, and more. It also allows you to satisfy the Affordable Care Act's (ACA) employer mandate for applicable large employers (ALEs).
• The group coverage HRA (GCHRA), also known as an integrated HRA: An option for organizations that want to supplement their existing group health insurance plans. A GCHRA doesn't allow you to reimburse employees for individual health insurance premiums.

How are healthcare stipends taxed?

HRAs aren't the only option for reimbursing employees' healthcare expenses. There are also employee stipends.

Unlike an HRA, healthcare stipends are considered taxable income. That's because stipends aren't a formal employer-sponsored health insurance plan and don't have as many regulations for qualified employee expenses. Similar to bonuses, stipends aren't tax-advantaged and count as taxable wages earned by the employee.

When employers reimburse out-of-pocket healthcare costs or medical insurance coverage premiums using a stipend, they pay payroll tax on those funds. But you aren't required to withhold Social Security or Medicare taxes. Employees are responsible for paying these taxes on top of their income tax.

Because Form W-2 documents include stipends, employees should set aside the amount needed to pay their taxes.

Why would you choose to offer a taxable health stipend?

Stipends have fewer regulations associated with them, making them a simple benefits solution for small organizations.

Your employees don't need medical insurance to participate in a stipend. This allows for stipends to cover an array of healthcare expenses for employees, no matter if they have an existing insurance policy, a health savings account (HSA), or flexible spending accounts (FSAs).

It also allows your employees who participate in premium tax credits to take advantage of these benefits without reducing their premium tax credit by their allowance amount or having to give it up entirely.

For those who already have a group health insurance plan or an HRA, taxable stipends can help employees with additional out-of-pocket health-related costs. They'll just have to pay taxes on these extra allowances.

Stipends are also a way to provide taxable reimbursement for mental health benefits that may not be covered by HRAs or group health insurance, offer wellness perks, and promote better wellbeing with a customized wellness program.

Because stipends are seen as additional fringe benefits by your employees, they do a better job of attracting and retaining workers than simply providing a salary increase to cover medical expenses.

Despite their allowances being considered taxable income, stipends can provide numerous benefits to employees.

Conclusion

The tax-advantaged nature of HRAs makes them a good option for employers that want to offer personalized, flexible health benefits to their employees. Compliance is vital, however. Without it, employers and their employees can miss out on tax savings.

On the other hand, a taxable healthcare or wellness stipend is a great benefit that goes hand-in-hand with offering health coverage.

Both stipends and HRAs allow for greater flexibility and cost control than traditional employer-sponsored insurance while empowering your workforce to use their allowances on the healthcare expenses that matter most to them.

No matter which benefit is best for your business, benefits administration software like PeopleKeep can help. With PeopleKeep, organizations can set up and manage a fully compliant HRA plan or employee stipend, including custom perks, in minutes.

Ready to offer your employees an HRA or health stipend? Schedule a call with a personalized benefits advisor today

This blog article was originally published on November 30, 2018. It was last updated on October 25, 2022.

1. https://www.irs.gov/newsroom/health-reimbursement-arrangements-hras

Originally published on October 25, 2022. Last updated October 25, 2022.

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