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Under IRC sections 105 and 106, employer-provided health benefits, including reimbursement and insurance, are generally excluded from the income of employees. This applies to any employer-paid system, whether the benefit is provided directly (i.e., through self-insurance) to employees or through an insurance provider or a trust. However, if the plan discriminates in favor of highly compensated employees, the amounts paid to those employees are subject to Federal income tax.
IRC § 105(h) If you would like the IRS guide on benefits, here is a linkhttp://www.irs.gov/pub/irs-tege/fringe_benefit_fslg.pdf
Thank you for your precise response.
Can benefit amounts differ between SIngle, Married, and Married with Family employees without having negative tax consequences?
As long as the plan does not discriminate based on higher compensatred employees being favored over others, the plan would be fine.
THank you again. THat answers my queston completely.
Glad to assist
Some follow up questions if I may:
1. If the annual maximum amount is not used up by the employee within a calendar year, the remaining amounts will be carried over to the following years, and if the employee terminates employment the company will pay off the employee (minus 5% to allow for adminstrative fee and corporate payroll tax) along with other severance payments (e.g. accrued vacation) minus income tax deductions.
Do you see anything wrong with this procedure from TAX perspective?
2. If the employee elects to take the HELTH CARE ALLOWANCE option instead of the REIMBURSEMENT option, we will add the allowance amount (which is 10% lower than the maxmimum reimbursement amount) to his regular monthly salary., with proper deductions.
Do you see anything wrong with this option given to the employee?
In number 1 it would make the pay off taxable like the severance.
In number 2 employee would have the tax deduction on their tax return providing they use Schedule A to itemize their deductions. The amounts that can be excluded from wages are the employer's contributions. If the allowance for health care is deducted from the wages of the employee pretaxed they are still taxable for FICA, if this is like a health savings plan that the employee can choose to be in as opposed to a reimbursement.
I understand now that the health benefit program that we had been talking about is called HRA (Health Reimbursement Arrangement) allowed by IRS. Since one of the requirement is to write up a PLAN DOCUMENT, I have been reading up on its regulations.
Under IRS publication 969, it specifically states, "YOUR EMPLOYER IS NOT PERMITTED TO REFUND ANY PART OF THE BALANCE TO YOU".
It sounds like the rule we established of making the balance of the account as part of severance payment at termination of employment is against that regulation.
On the other hand, I believe that the employer has the right to pay off any kind of severance pay.
Since the employer can establish the rule to forfeit the balance of the account, can we not establish the rule to forfeit the balance, and on the other hand pay off a severance pay based on the balance figure of the account?
If we can not, then it puts me in a bind.
I understand that there is a difference between "severance agreement payment" and payment at the time of termination no matter what.
So are you saying that we should treat this rule as "deferred compensation" for any type of termination? Can we not pay for termination for cause?
I am not 100% clear on what I shall do.
Excerpt from,<http://www.irs.gov/pub/irs-drop/n-02-45.pdf>, reads:
An HRA does not qualify for the exclusion under § 105(b) if any person has the
right to receive cash or any other taxable or non-taxable benefit under the arrangement
other than the reimbursement of medical care expenses. If any person has such a right
under an arrangement currently or for any future year, all distributions to all persons
made from the arrangement in the current tax year are included in gross income, even
amounts paid to reimburse medical care expenses. For example, if an arrangement
pays a death benefit without regard to medical care expenses, no amounts paid under
the arrangement to any person are reimbursements for medical care expenses
excluded under § 105(b). See § 1.105-2 of the Income Tax Regulations. Arrangements
formally outside the HRA that provide for the adjustment of an employee’s
compensation or an employee’s receipt of any other benefit will be considered in4
determining whether the arrangement is an HRA and whether the benefits are eligible
for the exclusions under §§ 106 and 105(b). If, for example, in the year an employee
retires, the employee receives a bonus and the amount of the bonus is related to that
employee’s maximum reimbursement amount remaining in an HRA at the time of
retirement, no amounts paid under the arrangement are reimbursements for medical
care expenses for purposes of § 105(b). Similarly, if an employer provides severance
pay only to employees who have reimbursement amounts remaining in a purported
HRA at the time of termination of employment, no amounts paid under the arrangement
are reimbursements for medical care expenses for purposes of § 105(b).
This sound like what we are trying to set up is not possible without jeopardizing the essence of the program. What do you think?
Severance being taxable is not a problem. I believe TAX free reimbursements of medical expenses will not be allowed if we set up severance payment based on the balance of the HRA account.