A memo from the IRS Chief Counsel clarifies when an employer’s payment for health insurance provided under a spouse’s group health plan can be excluded from the employee’s income.
The clarification is in the form of a 5-page memo originally drafted in October and publicly released late in November. It presents seven scenarios in which one spouse’s plan provides coverage for a second spouse, with the cost of that coverage being paid in several different ways.
The memo affirms that “an employer may exclude from an employee’s gross income payments for the cost of health insurance coverage provided through the spouse’s group health plan, but only to the extent the spouse has paid for all or part of the coverage on an after-tax basis and not through salary-reduction under a section 125 cafeteria plan.”
It then presents various scenarios in which one spouse’s employer reimburses that employee for some or all of the cost of the employee’s coverage paid by the other spouse.
The memo’s author, Henry Beker, Chief of the Health and Welfare Branch of the IRS Office of Associate Chief Counsel, then examines the tax ramifications of these various scenarios.
In the first scenario, Spouse A declines coverage with A’s employer while Spouse B accepts coverage with B’s employer and pays for coverage for A and B on an after tax basis. After substantiation of such coverage and after tax payment to A’s employer, A’s employer pays A for the self only portion of such payment.
A’s employer could also choose to pay the entire amount to cover both A and B on B’s employer’s health plan.
In either of these scenarios, the memo explains, the amounts paid can be excluded from Spouse A’s gross income, because that spouse is paying the premium for coverage under a group health plan for A and/or B.
The memo then looks at variations of the first scenario, such as if Spouse B pays through a salary reduction under a Section 125 “cafeteria” plan instead of on an after tax basis and A’s employer pays A for the self only portion. In such a variation, the payment may not be excluded from gross income.
Still other possibilities include is if each spouse elects self-only coverage under Spouse B’s plan, and Spouse A contributes the cost of his or her coverage under a salary-reduction plan; if the payments come from a Health Reimbursement Arrangement, and so on.
The memo notes that the IRS code states that “gross income of an employee does not include employer-provided coverage under an accident or health plan.” This would be the case for coverage of the employee or the employee’s spouse or dependents.
Under a Section 125 cafeteria plan, an employee can be permitted to choose between cash (e.g., salary) or qualified benefits, including health insurance. The amount of an employee’s salary reduction to purchase such qualified benefits is not included in gross income, even though the employee could have chosen cash over qualified benefits. For that reason the amount of such salary reduction is also excluded from FICA taxes, FUTA taxes and federal income tax withholding.