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- Regular reimbursements for employees are usually not taxable
- Excess reimbursements are classified as income and are taxable
- Reimbursements made from HSAs are taxable
- Reimbursements are typically associated with employees on group plans
- Reimbursements for dependents and spouses aren’t taxable
- Some employers offer employees health reimbursement arrangements
Generally speaking, reimbursements for health insurance are taxable if they were made in excess and contributed to the amount of income generated during the year. In addition, Health Reimbursement Accounts, often referred toHealth Reimbursement Arrangements, or HRAs, are tax-free. In order to determine which health insurance reimbursements are taxable, taxpayers need to understand a little bit more about the IRS and federal tax codes.
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HRAs may be described being group health plans funded by employers that reimburse employees tax-free up to a predetermined amount per year for qualifying expenses. Employers own and fund these accounts. The amount that goes unused throughout the year rolls over so it can be used in subsequent years.
Employers and Reimbursements
Before 2014, employers were permitted to reimburse employees for individual health insurance costs tax-free. Since then, employers who continue to provide these reimbursements without making the proper adjustments mandated by the Affordable Care Act could be subjected to fines that total up to $100 for each employee each day or $36,500 per employee.
In order to avoid these penalties, employers may establish their own self-sponsored health plan, increase employees’ base pay without restrictions or set up a Qualified Small Employer Health Reimbursement Arrangement, or QSHERA.
Deducting Reimbursements from Medical Expenses
When filing taxes, reimbursements, and payments from Medicaid are subtracted from the medical expenses the taxpayer paid out-of-pocket throughout the year.
Some of the reimbursements that aren’t deducted from the medical expenses accrued throughout the year include a loss of earnings and permanent loss or loss of use of a function or member of the body or disfigurement where the payment is for the nature of the injury rather than the time lost from work.
Accounting for Excess Reimbursements
When taxpayers have fully paid the policy premiums and medical expenses, any additional funds leftover from reimbursements are considered to be excess and should not be included in the gross income calculation.
When both the employer and employee contribute to the plan, any excess employer contributions must be included as gross income. If medical expenses are deducted and corresponding reimbursements received in subsequent years should be reported.
Assessing Excess Reimbursements
If the employer does not pay any part of the premiums for the employee, none of the excess reimbursement is taxable. If the employer’s contributions to premiums were included in the employee’s income, none of the excess reimbursement is taxable. If the employer contributed, but it wasn’t included in the employee’s income, and the employee did not contribute, all of the excess reimbursement is taxable.
When employer and employee have both contributed, but the employer’s contribution isn’t included in the employee’s income, only part of the excess reimbursement is considered to be taxable.
Employer contributions to the insurance plan may be paid directly to the provider or they may reimburse the employee for premium payments. Generally speaking, employees who personally own their health insurance policy will have the reimbursements excluded from their gross income and will not be taxed on them by the state or federal government.
Regular Reimbursements are not Taxable
The IRS typically doesn’t tax employees for regular reimbursements made from employers for paying health insurance premiums. Reimbursements for traditional premium payments that are paid from the employee or directly by the employer are generally not classified as taxable wages. The reimbursements typically become taxable when the funds are delivered in some alternative fashion.
Premium payments covering spouses and dependents are also considered to be regular reimbursements that are not taxable. Regardless of who the coverage is for, regular reimbursements for paying premiums are not taxable. Other medical expenses and long-term care premiums can also be exuded from wages.
Contributions from the Health Savings Account
Contributions made to a health savings account that are used to pay premiums are subject to Medicare, Social Security, and income taxes. The exception to the HSA rule is when the account is funded with money from a qualified cafeteria plan, which is not taxable. Otherwise, the employer will include the reimbursements on the employee’s W2 gross income and the appropriate amount of taxes are withheld.
Making Sense of Your Reimbursements
Regular reimbursements for traditional premium payments are typically not taxable. When the funds contributed by the employer are delivered by some other means, the reimbursements may be taxable. Any reimbursements in excess or saved in an HSA may be classified as income or taxable wages.
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