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IRS Addresses Employer Payment of Employee Coverage Provided Under a Spouse's Group Health Plan.

(Parker Tax Publishing December 14, 2015)

An employer may exclude from an employee's gross income payments for the cost of health insurance coverage provided through the spouse's group health plan, but only to the extent the spouse has paid for all or part of the coverage on an after-tax basis. No exclusion from income is available where coverage is paid through salary-reduction under a Code Sec. 125 cafeteria plan. CCA 201547006.

Background

The IRS Office of Chief Counsel (IRS) was asked to address whether an employer may, under Code Sec. 105 or Code Sec. 106, exclude from an employee's income payments for the cost of health insurance coverage provided to the employee through his or her spouse's employer's group health plan.

Under Code Sec. 106(a), the gross income of an employee does not include employer-provided coverage under an accident or health plan. Reg. Sec. 1.106-1 provides that the gross income of an employee does not include contributions which the employee's employer makes to an accident or health plan for compensation (through insurance or otherwise) for personal injuries or sickness to the employee or the employee's spouse or dependents. To the extent amounts are excluded from gross income under Code Sec. 106(a), they are also excluded from wages subject to income tax withholding. In addition, amounts paid, under a plan or system established by an employer that makes provision for the employer's employees generally (or for the employees generally and their spouses and dependents) or for a class or classes of the employer's employees (or for a class or classes of the employer's employees and their spouses and dependents), to reimburse medical expenses are excluded from FICA and FUTA wages.

Under Code Sec. 105(e), amounts received under an accident or health plan for employees are treated as amounts received through accident or health insurance for purposes of Code Sec. 105. Reg. Sec. 1.105-5(a) provides that an accident or health plan is an arrangement for the payment of amounts to employees in the event of personal injuries or sickness.

Code Sec. 125 provides that an employer may establish a cafeteria plan that permits an employee to choose among two or more benefits, consisting of cash (generally, salary) and qualified benefits, including accident or health coverage. Pursuant to Code Sec. 125, the amount of an employee's salary reduction applied to purchase such coverage is not included in gross income, even though it was available to the employee and the employee could have chosen to receive cash instead.

Analysis

The IRS looked at seven situations and concluded that an employer may exclude from an employee's gross income payments for the cost of health insurance coverage provided through the spouse's group health plan but only to the extent the spouse has paid for all or part of the coverage on an after-tax basis and not through salary-reduction under a Code Sec. 125 cafeteria plan.

One situation involved a married couple working for separate employers. The wife's employer offers a group health plan that she declines. Her employer also provides an arrangement under which it will reimburse her for the cost of coverage incurred by her husband, who participates in his employer's group health plan. Under the husband's employer's plan, an employee participating in the plan must make either an after-tax contribution of $100 per month for self-only insured coverage or an after-tax contribution of $175 per month for other than self-only insured coverage. The husband elects other than self-only coverage to cover both himself and his wife under his employer's group health plan. The wife substantiates to her employer that her spouse has $175 per month deducted from his pay on an after-tax basis, $75 of which represents the cost of her insured coverage. The wife's employer pays her $75 per month in addition to her other compensation.

In this situation, the IRS advised that the amounts paid to the wife by her employer for the health insurance coverage are excluded from her gross income under Code Sec. 106 and are also excluded from FICA taxes, FUTA taxes, and federal income tax withholding. The fact that the insured group health plan is provided by her husband's employer and not her employer does not change the result under these facts.

Another situation involved the same facts except that the husband elects self-only insured coverage under the group health plan of his employer and makes the $100 per month employee contribution by salary reduction through his employer's Code Sec. 125 cafeteria plan. The wife substantiates to her employer that her husband contributes $100 per month on a pretax basis through salary-reduction for self-only insured coverage under his employer's group health plan. The wife's employer pays her $100 per month in addition to her other compensation.

In this situation, the IRS advised, the amount paid for the insured health coverage by the husband through salary-reduction under a Code Sec. 125 cafeteria plan has been excluded from the husband's gross income. Accordingly, the arrangement under which the wife's employer makes payments to her fails to be a health plan and no amounts paid under the arrangement to any participant are excluded from the gross income under Code Sec. 105. The amounts paid under the arrangement to the wife and other participants, the IRS said, are also subject to FICA taxes, FUTA taxes, and federal income tax withholding.

For a discussion of the taxation of employer-provided accident and health benefits, see Parker Tax ¶120,101. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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