Health Insurance Reimbursements to Employees

published July, 2007

If you own your own business, or you do books for someone who does, you may already know the owner’s health insurance is treated differently on tax returns than the other employee’s health insurance benefits.

But what if your employee is covered by their spouse’s health insurance, and they don’t want to be on your company plan, or if they have their own insurance?

According to the IRS Revenue Ruling 61-146 from back in 1961, there are three things you MAY do to “reimburse” the employee:

  1. Reimburse the employee once or twice a year for the employer’s share of insurance premiums upon proof of prior payment of the premium by the employee. 
  2. Issue a check to each employee a check payable to the employee’s particular insurance company, or 
  3. Issue a check as in #2, except payable jointly to the insurance company and the employee.

If you use one of these methods, the contributions qualify to be excluded from taxable income to the employee (under Section 106 of the IRS Code).

Note: this does not include writing a check directly to the employee, and telling them “it’s for health insurance” and hoping that’s what they use the money for. 

The employee actually has to write the check for the health insurance—if they’re not paying for it themselves, that is, if the spouse’s employer is paying for it, then the money you’re giving them is NOT for health insurance—they’re not using the money for health insurance and is not eligible to be excluded from the employee’s income. 

Further, if the employee is ABLE TO DECIDE what to spend the money on, IT IS PAYROLL and is subject to payroll taxes.

If you follow one of the 3 rules, the employer can deduct the expense as a business expense. If you don’t follow one of the 3 rules, the employer may still deduct the expense, but it is includable as income to the employee and needs to be included on the employee’s W-2 at year end.