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Reimbursing employees for health insurance: tax issue unresolved

On Behalf of | Jun 5, 2014 | Internal Revenue Service

Last month we devoted a two-part post to the issue of worker classification and payroll taxes.

As we discussed, the question of whether a particular worker is an employee or an independent contractor has significant tax consequences. As we noted in our May 15 post, the IRS has been aggressively auditing employers in recent years, trying to detect misclassification.

In this post, we will take note of another tax-related issue that affects both employers and workers: options for providing or purchasing health insurance for employees.

The question of what legal responsibilities businesses have to employees under the Affordable Care Act (ACA) is a complicated one. It is beyond the scope of this post.

It is fair to say, however, that even if they are not legally required to provide health insurance, many small business owners feel a moral obligation to do so. Many of them have struggled, however, with the ever-increasing price tag of the premiums.

The New York Times reported yesterday on a way that some businesses have found to approach the financial challenge. It is a way that may allow small employers to offer affordable health insurance without putting undue strain on a company’s coffers.

The health insurance approach noted by the Times is called a “defined contribution” plan. It involves reimbursing employees for buying their own health insurance.

If set up properly, it could enable companies to contribute to employees’ purchase of health insurance in a way that is not taxable to employees – yet would still enable employers to exclude their contribution from payroll taxes.

The IRS has warned that the “defined contribution” approach may not fit with all of the fine print of the Affordable Care Act. But the issue is not yet fully resolved.

Source: The New York Times, “Risking a Health Insurnace Strategy the I.R.S. Might Not Approve,” Robb Mandelbaum, June 4, 2014


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