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Small Business Employee Benefits and HR Blog

FAQ: Can I Pay for Individual Health Insurance Tax-free?

Yes. Under Section 1.125-1(m), employees are able to reimburse themselves for personal health insurance policy premiums tax-free. See below for the pertinent section of the New Regulations for Cafeteria Plans. Many companies provide Section 125 Administration for group health insurance.

See www.zanebenefits.com/employee for an example of how this works for your individual health insurance plan.Is_Defined_Contribution_Right

New Section 125 Proposed Regulations: Section 1.125-1

(m) Payment or reimbursement of employees’ individual accident and health insurance premiums--(1) In general. The payment or reimbursement of employees’ substantiated individual health insurance premiums is excludible from employees’ gross income under section 106 and is a qualified benefit for purposes of section 125.

(2) Example. The following example illustrates the rule of this paragraph (m): 

Example. Payment or reimbursement of premiums.(i) Employer P’s cafeteria plan offers the following benefits for employees who are covered by an individual health insurance policy. The employee substantiates the expenses for the premiums for the policy (as required in paragraph (b)(2) in §1.125-6) before any payments or reimbursements to the employee for premiums are made. The payments or reimbursements are made in the following ways:

(ii) The cafeteria plan reimburses each employee directly for the amount of the employee’s substantiated health insurance premium;
(iii) The cafeteria plan issues the employee a check payable to the health insurance company for the amount of the employee’s health insurance premium, which the employee is obligated to tender to the insurance company;
(iv) The cafeteria plan issues a check in the same manner as (iii), except that the check is payable jointly to the employee and the insurance company; or
(v) Under these circumstances, the individual health insurance policies are accident and health plans as defined in §1.106-1. This benefit is a qualified benefit under section 125.

The notice and comment period for this Federal Register publication ended on November 15, 2007. The proposed regulations state: "Taxpayers may rely on these regulations for guidance pending the issuance of final regulations".

The proposed regulations were effective immediately upon their publication in the Federal Register. 

The Comprehensive Guide to the Small Business HRA