Misunderstandings of tax treatment of health insurance

An article in Forbes earlier this month was apparently misunderstood by some readers. PPACA is certainly difficult and some issues are not yet resolved. But we should not let that confusion undermine our understanding of basis tax principles governing the treatment of health insurance premiums paid by an employer.

I suggest that it would be good idea to go back to basics and reinforce an understanding of the basic principles of tax law controlling health insurance for common law employees:

1. Health insurance paid by an employer is not includable in taxable wages under IRC 106.

2. There is no authority to include employer-paid insurance costs in an employee’s taxable wages

3. Inclusion of employer-paid health insurance costs in an employee’s taxable wages is an accounting error. The consequences of that error are beyond the scope of this article.

4. If employer excise taxes for improper handling of employee health insurance under PPACA are applicable, these penalties are determined separately and without consideration of any wage tax treatment.

5. Improper wage tax treatment does not correct improper treatment for excise tax application. In other words, two wrongs do not make a right.

6. For this discussion, “paid by an employer” includes “reimbursed by an employer“.

7. This discussion does not include the treatment of owner/employees of pass-through entities. There is a different rule in these situations to allow these individual to qualify for the self-employed insurance deduction.

It surprises me that some accountants are proposing inclusion of health insurance in taxable wages. I presume that this proposed scheme has just not been thought through and that the imposition of PPACA considerations is clouding our thinking since most accountants are familiar with the basic tax rules listed above.

I wrote about this topic earlier from a slightly different perspective at http://tonynovak.com/article/taxation-of-health-insurance-benefits.htm that is updated for 2015.


3 responses to “Misunderstandings of tax treatment of health insurance”

  1. Jeannette Avatar

    This was also the conclusion I came to in my thought process (I’m a bookkeeper), but the CPA doing the taxes is on the other side of the fence and is counting the paid premiums as taxable income for the employee in what looks like an attempt to avoid penalties for the employer. I think the employee is getting a horriblysia raw deal. Do you have any further thoughts on this topic?

  2. This information as confirmed in IRS Notice 2015-17 on February 18, 2015. It includes further guidance on S-corporation shareholder/employees.

  3. Unless this is a shareholder/employee, this is professional negligence. Please have the employee contact me if they need assistance with recovery of damages.

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