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How Do Medical Reimbursements Work?

Posted by Eric Daniel on Oct 19 2016

The IRS prohibits employers from offering stipends or reimbursing employees for individual health plans, regardless of the tax treatment of the stipend or reimbursement. On the other hand, the IRS understands that employers have the right to set salaries however they like.

A healthy breakfast on display

So they will not stop an employer from setting a higher salary to offset an employee’s cost of individual health insurance. However, it is important to note that the employer should not require proof that an individual health insurance policy was purchased with the extra income. Similarly, the salary increase should not be contingent upon the purchase of individual health insurance. Violating this prohibition comes with a stiff penalty—an excise tax of up to $100 a day per employee—for either pre-tax or post-tax reimbursements of individual health plans. Therefore, if an employer increases taxable wages to offset the cost of individual health insurance plans, the employer should not use a separate line item on employee paychecks to indicate this increase.

Topics: Employee Benefits


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