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Small Business Employee Benefits and HR Blog

Tax-Free vs. Taxable Health Insurance Contributions

As a small business, there are different ways to contribute to employees’ health insurance. For example, the business can offer group health insurance coverage, reimbursement for individual health insurance, or a health insurance stipend.

With new health benefit options available, I often receive questions about tax-free vs. taxable health insurance. To help answer this common question, let’s look at situations when health insurance contributions are tax-free vs. taxable.

Tax-Free vs. Taxable Health InsuranceTax-Free Health Insurance Contributions

When contributions to health insurance are tax-deductible to the business and tax-free to employees, it means the business has a formal health-care plan in place.

Common tax-free health insurance or health benefit plans include contributions made to:

More information on tax-free employee health benefits can be found in IRS Publication 15-B.

Taxable Health Insurance Contributions

In some cases, employer contributions to employees’ health insurance may be taxable. For example, if the business offers employees a lump sum (“stipend”) to purchase health insurance the money is treated as taxable income.

Tip - Employers should take care not to offer an Employer Payment Plan, in which direct payment or reimbursement is made to employees for health insurance. Why? New penalties under the Affordable Care Act may apply. Instead, employers should use a compliant HRA to contribute tax-free to employees’ individual health insurance premiums.

Related: A Guide to the Small Business Healthcare Relief Act

Conclusion

The Internal Revenue Service (IRS) allows certain contributions to health care to be tax-free to employees and tax-deductible to the business. As a general rule of thumb, if the business has a formal health plan, the contributions are tax-advantaged. If the business has a more casual arrangement, the contributions are likely considered taxable income.

Further Reading

What questions do you have about tax-free vs. taxable health insurance contributions or reimbursements? Leave a comment below and we’ll help answer them.

The Comprehensive Guide to the Small Business HRA

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