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Small Business Employee Benefits and HR Blog

The 4 Key Tax Codes That Allow Tax-Preferred Premium Reimbursement

More and more, businesses are setting up self-insured medical reimbursement plans to reimburse employees tax-free for individual health insurance. As businesses transition to these types of premium reimbursement plans, it is important to understand the four key Internal Revenue Code (IRC) sections that allow for tax-preferred premium reimbursement.

The tax codes that allow tax-preferred premium reimbursement

This article is an excerpt from our new eBook "Compliance 101". Click here to download the free guide.

Self-Insured Medical Reimbursement Plans are a Tax-Free Employee Benefit

A self-insured medical reimbursement plan is a group health plan and is a tax-free employee benefit as outlined in Internal Revenue Section 105. When used for premium reimbursement, it is also called a Healthcare Reimbursement Plan (HRP) or Section 105 Medical Reimbursement Plan. 

For employers, this means reimbursements are tax-deductible as a business expense, the same way as premiums paid for a group insurance policy or other benefits expenses.

For employees, reimbursements are not included in employees’ income and thus not subject to any income or payroll tax withholding. However, the tax-free nature of reimbursements received by proprietors, partners, and some S-Corp shareholders may be limited. 

4 Key Sections of the Internal Revenue Code

There are four key sections of the IRC that allow tax-preferred premium reimbursement via a self-insured medical reimbursement plan.

  1. IRC Section 105: Section 105 allows tax-free reimbursements from a self-insured medical reimbursement plan if the reimbursements are for expenses incurred for “medical care” as defined in Section 213(d).

  2. IRC Section 213:  Section 213(d) defines “medical care” for personal deduction and Section 105 distributions, which includes amounts paid for insurance.

  3. IRC Section 106: Section 106 allows the value of the self-insured medical reimbursement plan to be tax-free to employees.

  4. IRC Section 162: Section 162 allows reimbursements to be tax-deductible to the employer as a business expense.

FAQ - How Has the Affordable Care Act Changed Tax-Preferred Premium Reimbursement?

The Affordable Care Act introduced new rules and regulations that group health plans must follow, such annual limit compliance (PHS 2711) and preventive care compliance (PHS 2713). As such, self-insured medical reimbursement plans used for premium reimbursement must be designed to comply with these ACA rules (as well as ERISA, HIPAA, COBRA, etc).

Regarding the tax-preffered treatment, however, nothing has changed. The tax code still allows tax-free reimbursement of individual health insurance via IRC Section 105 and IRC Section 213.

What questions do you have about the tax-free nature of premium reimbursement or self-insured medical plans? Leave a comment, or click here to download the Compliance 101 eBook.

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