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

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.  
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