Menu

IRS addresses employee reimbursements for health coverage in a spouse’s plan

RFP
IRS addresses employee reimbursements for health coverage in a spouse’s planIn an IRS Chief Counsel Advice memorandum (CCA 201547006), the IRS addressed the situation of  an employee of an employer being covered by a plan maintained by the employee’s spouse.

Some employers have a practice of reimbursing employees for all or a portion of the premium paid by the spouse. However, it isn’t clear whether the reimbursement is subject to income tax, Federal Insurance Contribution Act (FICA) tax or Federal Unemployment Tax Act (FUTA) taxes. The CCA concluded that if the spouse pays for the coverage on a pretax basis, which is often the case, the reimbursement is subject to income tax, FICA and FUTA. This conclusion is based on the fact that the premium is already being excluded from income, because it is made on a pretax basis. On the other hand, if the spouse pays for the premium on an after-tax basis, the reimbursement isn’t subject to income tax, FICA or FUTA.

Employers should be aware that premium reimbursement arrangements may run afoul of the market reforms under the Affordable Care Act and trigger a penalty of up to $100 per day per individual. Generally, if an employee is offered coverage by an employer, but declines, and instead takes coverage through his or her spouse’s employer, the penalties won’t be triggered. If an employee isn’t offered coverage by an employer, the premium reimbursement arrangement may trigger the penalty. See Notice 2013-54 and Notice 2015-17 for important details.  
 
Tax professional standards statement
This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.