Employer-paid health insurance may not be included in employee wages. Doing so, even in error, does not alleviate the employer from possible excise taxes under ACA. This errant accounting practice also creates additional employer tax penalty liabilities for improper reporting of wages.
This afternoon I attended a continuing professional education webinar where a fabulous tax expert asserted that under certain circumstances an employer’s payment or reimbursement for employee medical insurance is properly included in employee wages. With all the industry discussion and IRS commentary on this topic, it is disturbing to me that this error persists in the minds of some accountants. I am certainly not picking on this one presenter, but rather pointing out that the errant mindset persists.
IRS is clear on the matter: “If an employer pays the cost of an accident or health insurance plan for his/her employees, including an employee’s spouse and dependents, the employer’s payments are not wages and are not subject to Social Security, Medicare, and FUTA taxes, or federal income tax withholding”. IRS Publication 15B makes the issue even more clear by specifically listing various types of employer medical payments that are not wages. I wrote about the topic a year ago in deliberately plain and simple language after Forbes seemed to leave readers with the wrong impression.
Some accountants try to make the issue more complicated by adding comments about new ACA requirements or employer penalties for making these payments. While all of this is true, it has no impact on the underlying fact that employer payments for employee medical insurance are not wages. Simply re-titling such insurance or reimbursement payments in the accounting records as “wages” does not change the underlying facts and would not likely sustain a legal challenge to the fact that these payments are not wages.
Some accountants appear to be adamant about their “included in wages” position and might argue that this is only a matter of semantics. Yet just the opposite is true. In similar past legal challenges of employee benefit transactions the courts have relied on the substance of the transaction rather than how the employer classified it in their accounting records. In this light, the strategy of mis-classifying the payments as wages is simply an accounting gimmick designed, in some cases, to avoid employer liability for excise taxes. This issue is likely to eventually be resolved by legal challenge. It is possible that employee awards for this accounting error could be substantial.
It is certainly very smart for employers to stop making certain types of medical insurance and reimbursement payments and instead increase employee taxable wages instead. That change would involve procedures (described in other posts on this blog) beyond simply renaming the payments as something other than what they truly are as evidenced by the underlying facts. Yet, for now, we have reliable indications that tens of thousands of small business employers are, in fact, making payments for employee health insurance in various types of arrangements. Some of these arrangements are harmless and others trigger large tax penalties. Regardless of the tax implications, accountants are naive to think that they can address the issue simply by calling these payments “wages”.
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