Are Reimbursements for Health Insurance Allowed?

by Mammoth Team on October 11, 2016

Health Insurance Reimbursements

Q: We plan on offering group health insurance sometime soon, but in the meantime, we’d like to give employees medical reimbursements in their paychecks in lieu of offering insurance. Is this allowed? 

A: 
Before you adjust your employees’ paychecks, keep in mind that the IRS prohibits employers from offering stipends or reimbursing employees for individual health plans, regardless of the tax treatment of the stipend or reimbursement. On the other hand, the IRS understands that employers have the right to set salaries however they like. So they will not stop an employer from setting a higher salary to offset an employee’s cost of individual health insurance. However, it is important to note that the employer should not require proof that an individual health insurance policy was purchased with the extra income. Similarly, the salary increase should not be contingent upon the purchase of individual health insurance.

Violating this prohibition comes with a stiff penalty—an excise tax of up to $100 a day per employee—for either pre-tax or post-tax reimbursements of individual health plans. Therefore, if an employer increases taxable wages to offset the cost of individual health insurance plans, the employer should not use a separate line item on employee paychecks to indicate this increase.

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Topics: Compliance

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