No one agrees on the exact numbers, but it’s a safe bet to say that over the next few years millions of Americans will sign up for health insurance on the now-open public exchanges.
Some of those people will have been shifted to the exchanges by mostly smaller employers. But larger employers aren’t likely to be part of that wave. In fact, industry analysts say most Americans will continue to get coverage through an employer.
1. May an employer deduct as a business expense the cost of premiums paid for accident and health insurance for employees?
An employer generally can deduct as a business expense all premiums paid for health insurance for one or more employees. This includes premiums for medical expense insurance.
If a payment is considered made to a fund that is part of an employer plan to provide the benefit, the deduction for amounts paid or accrued may be limited.Premiums are deductible by an employer whether coverage is provided under a group policy or under individual policies. The deduction for health insurance is allowable only if benefits are payable to employees or their beneficiaries; it is not allowable if benefits are payable to the employer. Where a spouse of an employer is a bona fide employee and the employer is covered as a family member, the premium is deductible. A corporation can deduct premiums it pays on group hospitalization coverage for commission salespersons, regardless of whether they are employees. Premiums must qualify as additional reasonable compensation to the insured employees.
2. What credit is available for small employers for employee health insurance expenses?
A credit is available for employee health insurance expenses of an eligible small employer for taxable years beginning after Dec. 31, 2009, provided the employer offers health insurance to its employees.
An employer must have a contribution arrangement for each employee who enrolls in the health plan offered by the employer through an exchange that requires that the employer make a non-elective contribution in an amount equal to a uniform percentage, not less than 50 percent, of the premium cost.An eligible small employer is an employer that has no more than 25 full time employees, the average annual wages of whom do not exceed $50,000 (in 2010, 2011, 2012, and 2013; the amount is indexed thereafter).
3. Is the value of employer-provided coverage under accident or health insurance taxable income to an employee?
Likewise, the value of critical illness coverage is not taxable income to an employee.This includes medical expense and dismemberment and sight loss coverage for the employee, his or her spouse and dependents, and coverage providing for disability income for the employee. There is no specific limit on the amount of employer-provided coverage that may be excluded from an employee’s gross income. Coverage is tax-exempt to an employee whether it is provided under a group or individual insurance policy.
4. What are the tax consequences of payments received by employees under employer-provided accident or health insurance?
Although the amounts that both employers and employees pay for premiums for employer sponsored health and accident insurance plans must now be stated on the employee’s Form W-2, the tax consequences of receiving benefits pursuant to those plans have not changed. However, some payments must be included in the employee’s gross income, explained below.
Amounts received by an employee under employer-provided accident or health insurance, group or individual, that reimburse the employee for hospital, surgical, and other medical expenses incurred for care of the employee or his or her spouse and dependents generally are tax-exempt without limit.
5. What nondiscrimination requirements apply to employer provided health insurance plans?
Under PPACA 2010, a group health plan other than a self-insured plan must satisfy the requirements of IRC Section 105(h)(2). More specifically, PPACA 2010 states that rules similar to the rules in IRC Section 105(h)(3) (nondiscriminatory eligibility classifications), Section 105(h)(4) (nondiscriminatory benefits), and Section 105(h)(8) (certain controlled groups) apply to insured plans. The term highly compensated individual has the meaning given that term by IRC Section 105(h)(5).
A plan is not considered self-insured merely because prior claims experience is one factor in determining the premium. Furthermore, a policy of a captive insurance company is not considered self-insurance if, for the plan year, premiums paid to a captive insurer by unrelated companies are at least one-half of the total premiums received and the policy is similar to those sold to unrelated companies.An accident or health insurance policy may be an individual or a group policy issued by a licensed insurance company, or an arrangement in the nature of a prepaid health care plan regulated under federal or state law including an HMO. Unless a policy involves shifting of risk to an unrelated third party, a plan will be considered self-insured.
6. What nondiscrimination requirements apply to self-insured health plans?
Nondiscrimination requirements apply to self-insured health benefits, although the IRS announced in Notice 2011-1 on Dec. 22, 2010, that compliance with nondiscrimination rules for health insurance plans will be delayed until regulations or other administrative guidance has been issued. This guidance remains pending. The IRS indicated that the guidance will not apply until plan years beginning in specified periods after guidance is issued. Some plans will be grandfathered.
A self-insured plan is one in which reimbursement of medical expenses is not provided under a policy of accident and health insurance. According to regulations, a plan underwritten by a cost-plus policy or a policy that, in effect, merely provides administrative or bookkeeping services is considered self-insured.Benefits under a self-insured plan generally are excludable from an employee’s gross income. If a self-insured medical expense reimbursement plan or the self-insured part of a partly-insured medical expense reimbursement plan discriminates in favor of highly compensated individuals, certain amounts paid to highly compensated individuals are taxable to them.
7. What are the tax consequences for amounts paid by an employer to highly compensated employees under a discriminatory self-insured medical expense reimbursement plan?
The taxable amount of payments made to a highly compensated individual from a discriminatory self-insured medical expense reimbursement plan is the excess reimbursement. Two situations produce an excess reimbursement.
The second situation occurs when benefits are available to all other participants and are not otherwise discriminatory and where a plan discriminates as to participation; here, excess reimbursement is determined by multiplying the total amount reimbursed to the highly compensated individual for the plan year by a fraction. The numerator is the total amount reimbursed to all participants who are highly compensated individuals under the plan for the plan year; the denominator is the total amount reimbursed to all employees under the plan for such plan year. In determining the fraction, no account is taken of any reimbursement attributable to a benefit not available to all other participants.The first situation occurs when a benefit is available to a highly compensated individual but not to all other participants, or that otherwise discriminates in favor of highly compensated individuals; the total amount reimbursed under the plan to the employee with respect to that benefit is an excess reimbursement.
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