A common question we receive from small employers and their advisors is, “Is tax-free health insurance reimbursement still allowed?” The answer is yes, although there is a right way and a wrong way to go about it.
Note - This question was asked during our recent webinar, “Can Tax-Free Premium Reimbursement Work for You?” If you'd like to download the on-demand webinar and slides, click here.
The Tax Code Still Allows Tax-Free Reimbursement
First, tax-free reimbursement of individual health insurance is 100 percent allowed under current Internal Revenue Code (IRC).
IRC Section 105: Section 105 allows tax-free reimbursements from a self-insured medical reimbursement plan if the reimbursements are for expenses incurred for “medical care” as defined in Section 213(d).
IRC Section 213: Section 213(d) defines “medical care” for personal deduction and Section 105 distributions, which includes amounts paid for insurance.
IRC Section 106: Section 106 allows the value of the self-insured medical reimbursement plan to be tax-free to employees.
IRC Section 162: Section 162 allows reimbursements to be tax-deductible to the employer as a business expense.
As you can see, one key piece is that a formal, self-insured medical reimbursement plan is used (sometimes called a Healthcare Reimbursement Plan or Section 105 Plan).
Another key piece is that a self-insured medical reimbursement plan is a group health plan. As such, it must also comply with the new Affordable Care Act (ACA) Market Reforms.
Compliance with Market Reforms
To reimburse employees tax-free, and to avoid costly fees, the reimbursement plan must be designed to comply with the ACA Market Reforms (PHS 2711 and PHS 2713), as well as existing federal regulations (ERISA, HIPAA, COBRA, IRS).
How can a reimbursement plan comply with the Market Reforms?
PHS Act 2713 requires all group health plans to cover basic preventive health services without cost-sharing. To comply, the reimbursement plan reimburses basic preventive care on an unlimited basis.
PHS Act 2711 provides that no annual or lifetime limits may be placed on essential health benefits. To comply:
The reimbursement plan may not place an annual limit on the basic preventive health services.
Health insurance premiums are not essential health benefits – so, a premium reimbursement plan can place a “premium-specific” annual limit on premium reimbursements.
Under current tax code, tax-free reimbursement of individual health insurance is still allowed through a self-insured medical reimbursement plan.
The reimbursement plan, however, must be structured to comply with the new group health plan reforms. An example of a compliant plan used for tax-free individual health insurance reimbursement is a Health Reimbursement Plan.
What questions do you have about individual health insurance reimbursement? Leave a question below.