Employer health payments are NOT taxable compensation

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October 21, 2015 by Tony Novak

A conversation with an accountant today prompted this post that I’ve written about before.

Employer-paid health benefits, whether for any type of health insurance or reimbursement plan for qualified out-of-pocket health care costs are NOT taxable wages to an employee (except in very limited circumstances that don’t apply to the overwhelming majority of small businesses).

Is simply an accounting error to count these employer payments as taxable compensation to an employee. Yet I often see employers who think that the Affordable Care Act changed this.

I point out that there is nothing in the Affordable Care Act that changes anything about the way that taxable wages or non-taxable health benefits are calculated and wage taxes are paid.

One way the payment might be taxable is if there is no “plan” by definition and this is unlikely because of the liberal IRS definition of employer health plan with regard to these types of payments. Any association between an employer payment and employee health expenses would likely constitute a “plan”. Also some payments on behalf of union employees might be treated differently but this is likewise a rare circumstance.

See Revenue Ruling 61-146 issued back in 1961 that was reaffirmed after implementation of ACA in 2013 in IRS Notice 2013-54.

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