All monies given to an employee as an “advance reimbursement” or “loan” are counted as gross income, and thus should have the appropriate employment taxes withheld, regardless if the employee incurred any uninsured medical expenses during the year.
The revenue ruling examined two possible scenarios an employer might encounter when determining the proper way to handle “advance reimbursements” or “loans.”
An employer provides health coverage to its employees providing for accident or health coverage through a group health insurance policy.
The employer automatically deducts the cost of the coverage from its employees enrolled in the insurance, thereby applying the salary reduction amounts to the payment of the premiums for the group health insurance policy for the employee during the year.
To restructure the salary reduction for the group health insurance policy, the employer makes payments to an employee in amounts that cause the employee’s after-tax pay from the employer to be the same or approximately the same as what it would have been if there were no salary reductions to pay premiums for the group health insurance policy. These payments would be characterizes as “advance reimbursements” of the uninsured medical expenses.
Even though the payments are made as an “advance reimbursements” for payments to an uninsured medical expenses, those amounts are paid to the employee regardless of whether the employee incurs expenses for medical care or suffers a personal injury or sickness during the year.
The employers “advance reimbursement” plan is therefore not an accident or health plan because it is not an arrangement for the payment of amounts to employees in the event of personal injuries or sickness.
In addition, the exclusion from gross income under Section 105(b) applies only to amounts paid specifically to reimburse medical care expenses and does not apply to amounts that the employee would be entitled to receive regardless of whether or not the employee incurs expenses for medical care.
Any amount the employee received for uninsured medical expenses given in the “advance reimbursement” should be treated as additionally compensation with the proper tax withholdings taken from the employee’s gross wages.
Similar facts as the first scenario, only the employer reimburses an employee’s health insurance premiums through “loans” rather than “advance reimbursements.” Although the employer characterizes the payments to the employee as “loans,” it is understood that the employee will never become obligated to repay any of the “loans”. Under this plan, when the employee submits uninsured medical claims, the employer treats the reimbursements as an offset against that amount of the “loans.”
The plan is implemented by making “loans” to the employee sufficient to cause the employee’s after-tax pay to remain essentially unchanged. The “loans” only become due and payable at the time the employee submits claims for uninsured medical expenses.
Again, the exclusion from gross income under Section 105(b) applies only to amounts paid specifically to reimburse medical care expenses and does not apply to amounts that the employee would be entitled to receive regardless of whether or not the employee incurs expenses for medical care. Proper withholding should be taken out of the employee’s gross wages for the full amount of the loan.
A full text of the Revenue Ruling can be found at http://www.irs.gov/pub/irs-irbs/irb02-49.pdf .