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Small Business Employee Benefits and HR Blog

Tax Treatment for Employee Medical Expense Reimbursement

August 20, 2015

Employee Medical Expense Reimbursement Tax TreatmentReimbursement of employee medical expenses is a common practice, especially among small employers looking for more affordable health insurance solutions. There are several ways to go about employee medical expense reimbursement, so what is the tax treatment? Here’s a look at the tax treatment for different reimbursement scenarios.

Formal Medical Reimbursement Plans - Tax Treatment

If you offer a formal medical reimbursement plan, such as a Health Reimbursement Account (HRA), reimbursements are tax-deductible to the business and tax-free to employees.

These types of reimbursement plans allow for tax-free reimbursement of expenses incurred for medical care as defined in Section 213(d), including reimbursement for individual health insurance expenses.

We receive a lot of questions about how these types of reimbursement plans comply with the new health reforms, and if they are still allowed. Tax-advantaged medical reimbursement plan are still allowed. They must, however, be designed to comply with federal rules under the Affordable Care Act and Small Business Healthcare Relief Act.

To summarize, formal medical reimbursement plans are:

  • Tax deductible to the employer, similar to premiums paid for group health insurance premiums.

  • Tax-free to employees. Reimbursements are not taxable income, and not included on the employee’s W2.

  • Must comply with applicable rules and reforms.

    Interested in offering a medical reimbursement benefit? PeopleKeep can help. Check out how the PeopleKeep software works and evaluate whether medical reimbursement and other personalized benefits are right for your business.

Casual Medical Expense Reimbursement - Tax Treatment

If you offer employees reimbursement for medical expenses without a formal plan, reimbursements are treated as taxable income.

Examples of scenarios where the reimbursements are taxable include: grossing up employees’ wages, providing cash for healthcare, or reimbursing employees directly for medical or premium expenses.

Important Note: The rules for reimbursing employees' medical expenses have changed. Employers should avoid reimbursing employees directly for medical expenses or pay for their expenses directly. This type of an arrangement is considered an Employer Payment Plan, and employers could face steep fines for non-compliance.

Related: 4 Rules for Giving Employees Cash for Health Insurance

Conclusion

As a general rule, medical expense reimbursement is tax-advantaged if the employer uses a formal, compliant reimbursement plan. If the business is using a more casual arrangement, reimbursements are taxable and care should be taken not to offer an Employer Payment Plan.

What questions do you have about the tax treatment of employee medical expense reimbursement? Leave a comment below.

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