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Category: Tax
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Experience:  CPA with tax experience.
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I am considered a highly compensated employee and recently

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I am considered a "highly compensated employee" and recently received a severance package from my employer that includes the company continuing to pay the employer portion of my health care premiums. Since this is something that non-HCE do not receive other than for the 60 notice period, the company is treating the employer paid health care premiums as income. The company has cited Treasury Regulation scetion 1.105-11. My reading of the section is that if the HCE's type of benefit, dollar limitation of benefit are the same as non-HCE retired participants, then the benefits would not be considered a discriminatory benefit. The company disagrees with this analysis and is treated my employer provided premiums as inputed income. Is this correct?
Submitted: 7 years ago.
Category: Tax
Expert:  JKCPA replied 7 years ago.
Thanks for your question. Unfortunately, I believe your ex-employer is correct. Based on IRC 105(h)(7) below, you must take the entire plan year into consideration in determining whether the benefits are discriminatory. Since you are getting your premiums paid for all days through the end of the plan year and the non-HCE's are getting less days paid, the amount that you are reimbursed for in excess of the amount the non-HCE's receive, is considered taxable income based on the bolded formula below.

Excess reimbursement of highly compensated individual
For purposes of this section, the excess reimbursement of a highly compensated individual which is attributable to a self-insured medical reimbursement plan is—
(A) in the case of a benefit available to highly compensated individuals but not to all other participants (or which otherwise fails to satisfy the requirements of paragraph (2)(B)), the amount reimbursed under the plan to the employee with respect to such benefit, and
(B) in the case of benefits (other than benefits described in subparagraph (A) [1] paid to a highly compensated individual by a plan which fails to satisfy the requirements of paragraph (2), the total amount reimbursed to the highly compensated individual for the plan year multiplied by a fraction—
(i) the numerator of which is the total amount reimbursed to all participants who are highly compensated individuals under the plan for the plan year, and
(ii) the denominator of which is the total amount reimbursed to all employees under the plan for such plan year.
In determining the fraction under subparagraph (B), there shall not be taken into account any reimbursement which is attributable to a benefit described in subparagraph (A).

Now for some possible good news, since they will be including an amount for health insurance premiums in your taxable income, this amount will qualify to be deducted as an itemized deduction on Schedule A, line 1, subject to the 7.5% of AGI limitation.

I hope this helps. Please click on the green Accept button below as I do not get credit for my answer if you don't. Thanks!

Edited by J. Michael Knoebel on 10/3/2009 at 6:25 PM EST
JKCPA and other Tax Specialists are ready to help you
Customer: replied 7 years ago.
Thanks, XXXXX XXXXX question. The company is not treating this as (7)(B) as you outlined above, but as (7)(A). They quoted 1.105-11 (c)(3)(iii), "to the extent that an employer provides benefits under a self-insured medical reimbursement plan to a retired employee that would otherwise be excludable from gross income under section 105(b), determined without regard to section 105(h), such benefits shall not be considered a discriminatory benefit under this paragraph (c). the preceeding sentence shall not apply to a retired employee who was a highly compensated individual unless the type, and dollar limitations, of benefits provided retired employees who were highly compensated individuals are the same for all other retired participants." I was thinking that I was receiving the same type and dollar limitation of benefits provided to all other retired participants, other than my company was continued to pay the company's portion of the health premium. Does the payment of the premium trip either the type of benefit or the dollar limitation of benefits? If you consider the premium payment a type of benefit, then it would be taxable. I have seen other comments that would suggest that it would not violate the type or dollar limitation of benefits.
Customer: replied 7 years ago.
Will you answer the follow-up question?
Expert:  JKCPA replied 7 years ago.
Hi. Sorry about the delay. Is this insurance considered COBRA or retiree health coverage? If it's under COBRA, I would have to agree the employer paid premiums should be non-taxable to you per IRS Publication 15B, top of page 7.

If it is retiree health insurance, if you disagree with your employer's treatment of the premiums, you could attach Form 8275 to your income tax return explaining your position on the regulation and excluding this amount from your income. You might want to do this even if it is COBRA. Then the IRS may be a bit more lenient if the return pops up for a discrepancy when matching wage data.

It could be that the Regs are only talking about medical benefits and types of insurance but I would think an employer paid premium is a type of benefit. That is my opinion. Anyway, if you want to re-open the question for another expert's opinion, let me know.


Edited by JKCPA_Alliance ATS on 10/5/2009 at 4:47 AM EST