Reimburse employee for insurance premiums

Dear Tax Talk,
I own a small company with only a couple of employees. We have a health insurance plan that repays employees’ health insurance premiums for plans they obtain. Thus it is a deductible business expense.

One of my employees is a retiree who continues to receive health insurance through his former employer — but he must pay monthly after-tax premium contributions for this coverage. My question is: Can my company repay him and deduct the expense for these premium contributions to his former company’s plan?
— Mark

Dear Mark,
You say your employee is a retiree? But if he is an employee of yours, then how is he retired? Let’s just say he’s an employee and he gets his health coverage from a former employer. Presumably it is either cheaper or better that he does this rather than go on your plan.

Well, it is pretty clear that if he were on your health plan, the premiums that you as his employer pay would not be considered wages to him. But in that case you would be paying the insurance provider directly. In this case, however, you’d be giving the employee a payment directly. If a payment is made to an employee, the employer has to determine if it is a qualified fringe benefit exempt from taxes. Otherwise employment taxes are due.

Under Internal Revenue Code Section 105, payments to an employee to reimburse for otherwise deductible medical care expenses, including insurance, are excludable from wages. Reimbursements have to be made under an accountable expense plan. This means that the employee needs to provide to you sufficient evidence to justify the reimbursement. For example, a copy of the insurance bill would be sufficient evidence.

Such payments for insurance premiums would be deductible by the employer.

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