Discussion:Cash in Lieu of Health Insurance
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Discussion Forum Index --> Tax Questions --> Cash in Lieu of Health Insurance
Msmith7305 (talk|edits) said: | 15 September 2006 |
| Need to be steered to the regs regarding an employee who wishes to do the health insurance thing differently. Employer provides health insurance to employee at cost to employer of $ 400 per month. Employee's wife can get health insurance at her job at cost to her of $ 200 a month. Employee, therefore, wishes employer to give him $ 400 a month in additional cash and have wife purchase insurance from her employer.
What is the proper way to treat this? Employer is willing to do this. Thanks | |
Death&Taxes (talk|edits) said: | 15 September 2006 |
| You hit the nail on the head, Jdugan! I see this happen often. | |
| 16 September 2006 | |
| Agree. Taxable W-2 wages.
And be sure that you deduct the company SS/Med matching from the $400 to make sure it doesn't cost the company more than $400 total. | |
| 18 September 2006 | |
| I'm missing something here. I thought that an employer (with simple documentation in file) can reimburse an employee in this type of situation, for the amount of the insurance coverage paid for by the spouse. If the employer pays $400 to the employee, as long the employee provides proof of outside insurance coverage, then wouldn't only $200 be taxable compensation to the employee and not the entire $400? | |
| 19 September 2006 | |
| If an employee is given a choice between cash and a nontaxable benefit, the benefit becomes taxable under the constructive receipt rules unless the benefit is offered under a Sec. 125 plan. | |
| 19 September 2006 | |
| Then I am lost. I understand that when an employee is given a choice between cash and a nontaxable benefit and takes the cash that it is compensation to that employee (doesn't this have to be part of a Sec 125 plan?). What I don't understand is if this is simply a situation where the employee (or employee's spouse) has an individual plan and the employer reimburses the employee for the cost of that premium (and the employee provides proof of the coverage), then why is there a question of taxability? | |
| 20 September 2006 | |
| If the employer gives the employee a choice between $400 in cash or company paid health insurance, then the $400 is taxable under the constructive receipt rules (unless this is through a 125 plan).
However, if the employer gives the employee a choice between (A) $200 in cash plus company paid coverage under the employee's spouse's plan, or (B) coverage under the company plan, then only $200 would be taxable under the constructive receipt rules. Note, in order for coverage under the wife's plan to be a non-taxable benefit for the husband, the husband's employer must verify current coverage and premium payments by the wife. Rev. Rul. 61-146. | |
| 21 September 2006 | |
| I'm sorry, but I'm going to keep asking because I don't understand. I think we've kind of gotten away from Mssmith's original question. He/she didn't mention anything about a 125 plan nor anything about giving the employee a choice. IF the employee is given a choice of receiving cash or fringe benefit, then that is a cafeteria plan and if the employee chooses cash then it is taxable compensation. But, in this case, unless I'm totally misunderstanding (it's been known to happen), the employer was going to provide the employee with HI coverage that would cost the employer $400. If the employee can get coverage through his wife's employer for only $200, can't the employer simply reimburse the employee $200 (with proof provided and thus non taxable) AND then pay the employee $200 more, if the employer wants to and just make that additional taxable compensation? Maybe I'm making this too simplistic (or too difficult), but I just don't see why the employer cannot reimburse the employee without that part of it being nontaxable. I apologize for my hard-headedness. | |
Mtmckeecpa (talk|edits) said: | 21 September 2006 |
| LJ,
The way I am reading Riley's last response of: "However, if the employer gives the employee a choice between (A) $200 in cash plus company paid coverage under the employee's spouse's plan, or (B) coverage under the company plan, then only $200 would be taxable under the constructive receipt rules.
I believe Riley is saying that the $200 is nontaxable and the additional $200 is taxable subject to Rev Rule 61-146. | |
| 21 September 2006 | |
| <the $200 is nontaxable and the additional $200 is taxable subject >
OK, just to play the other side. The husband is going to get a $200 nontaxable benefit paid for by his employer. And the wife is going to get an additional nontaxabale benefit when her premiums go up for including her husband? Ie For example, Health Insurance might cost her $150 thru her employer, but increases to $350 for a "family" plan. So in effect the wife will be a tax free benefit of $350. And then the husband $200 from his employer? Seems like double dipping to me. | |
Death&Taxes (talk|edits) said: | 21 September 2006 |
| I think Msmith needs to clarify; he is not clear who the $200 covers, one or both of them. I can read it either way. | |
| 21 September 2006 | |
| This is really dumb. Is the employer's reimbursement limited to the added cost to cover the employer only? What if...the employer and his/her spouse had a personal individual/family policy that was $150 if it covered the employee only and $350 for family coverage. What can the employer reimburse then? Gosix, I don't follow you on the double dipping part. Assuming that the wife's employer covers her and if she wants to add spouse/family then that costs her $200, how is that double dipping? Are you assuming that her employer would pay for her to have family coverage? I guess that could happen, but I would imagine that it wouldn't. | |
| 21 September 2006 | |
| <Are you assuming that her employer would pay for her to have family coverage? >
I'm assuming the employer would just withhold another $200 out of her pay taxfree. Meanwhile the husband would be trying to get the same $200 given to him taxfree. | |
Msmith7305 (talk|edits) said: | 25 September 2006 |
| Thanks for all the replies-
RR 61-146 was the answer I was looking for. Compliance with this ruling will allow employer reimbursement under the facts as outlined in the ruling. Sec 125 plans are not an issue in my client's case. | |
| 26 September 2006 | |
| Msmith, RR 61-146 will allow an exclusion for the first $200 per month, but the $200 balance of the reimbursement will be just regular wages. | |
Msmith7305 (talk|edits) said: | 27 September 2006 |
| Understood. | |
