Employee Benefits Blog

Posts tagged taxable income

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Employers Can’t Reimburse the Cost of Employees’ Individual Health Policies on an After-Tax Basis

As we discussed in a previous post, the IRS issued Notice 2013-54 in September 2013 to discuss the application of the “market reform” provisions of the Affordable Care Act (ACA) to certain employer healthcare arrangements, including, among others, arrangements under which employers pay for employees’ individual health insurance policies, either by paying the insurance company directly or by reimbursing the employee.

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IRS Notice 2013-54 and S Corporation Shareholder-Employees

In a previous post we discussed IRS Notice 2013-54, in which the IRS reversed its previous position by indicating that, when an employer pays for an employee’s individual health insurance policy premiums, the benefit can no longer be provided on a pre-tax basis and must now be treated as taxable wages.  We encountered a situation recently which led us to conclude that, while it is not free from doubt, it appears that S corporation owner employees who directly or indirectly own at least 2% of the shares may now potentially be in a more favorable position than owner-employees of C corporations.

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Individual Health Insurance Policies Can Now Be Provided to Employees Only On After-Tax Basis

On Friday, September 13, the IRS issued Notice 2013-54 to discuss the application of the “market reform” provisions of the Affordable Care Act (ACA)  to certain employer healthcare arrangements, including, among others, arrangements under which employers pay for employees’ individual health insurance policies, either by paying the insurance company directly or by reimbursing the employee. The Notice, which mirrors substantially identical guidance issued by the DOL, also covers health reimbursement accounts under Section 105 and health flexible spending arrangement under Code Section 125.  The “market reform” provisions include the requirements to provide certain preventive services with no cost-sharing and to refrain from imposing a lifetime cap on benefits.  There are many aspects to this Notice, but this post will focus only on its impact on employers’ subsidies of employees’ individual health insurance policies.

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Hurricane Sandy: Favorable Rules for Leave-Sharing Plans

As discussed in our August 10, 2012 post on medical leave-sharing plans, employees are generally taxed on income that they earn and then assign to somebody else.  In IRS Notice 2006-59, the IRS created an exception in the case of certain leave-sharing plans under which employees transfer earned leave to an employer-sponsored leave bank for use by other employees who have been adversely affected by a major disaster.  (This exception was created in the wake of Hurricane Katrina.)  In IR-2012-84, the IRS indicated that this treatment applies in the case of Hurricane Sandy.  Thus, for leave-sharing plans that meet the specific requirements of Notice 2006-59, the recipient of the leave, not the donor, is taxed on the forgone leave.

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Hurricane Sandy: Favorable Rules for Leave-Based Charitable Donation Programs

In general, employees are taxed on compensation that they earn even if they assign it to someone else, and they can claim deductions for contributions to charity only if they itemize their deductions.  Also, the deduction available to C corporations for charitable contributions is generally less favorable than the deduction for business expenses, in that the charitable contributions deduction generally cannot exceed 10% of the corporation’s taxable income.

In Notice 2012-69, the Internal Revenue Service relaxed all of these general rules for leave-based charitable contribution programs to benefit victims of Hurricane Sandy.  Under such a program, employees would elect to forgo vacation, sick, or personal time in exchange for cash donations by their employer to a Section 170(c) tax-exempt charitable organization for the relief of victims of Sandy.

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Medical Leave-Sharing Plans

Based on a small sample size (a few discussions with different clients during the past several weeks), medical leave-sharing plans seem to be a hot topic of late.  This post will briefly go over the most significant applicable guidance and will discuss a few practical considerations regarding whether and how to implement this type of program.