The tax treatment of amounts received through accident and health plans is governed by Section 105 of the Internal Revenue Code. The treatment is relatively simple; the only common difficulty comes from the distinctions in treatment between insured and uninsured health plans. The tax code is reproduced below.
There is a minor typographical error in this section of the tax code. The text in (h)(7)(b) is missing a closing parentheses,
26 USC § 105 – Amounts received under accident and health plans
(a) Amounts attributable to employer contributions
Except as otherwise provided in this section, amounts received by an employee through accident or health insurance for personal injuries or sickness shall be included in gross income to the extent such amounts
Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include amounts referred to in subsection (a) if such amounts are paid, directly or indirectly, to the taxpayer to reimburse the taxpayer for expenses incurred by him for the medical care (as defined in section 213(d)) of the taxpayer, his spouse, his dependents (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), and any child (as defined in section 152(f)(1)) of the taxpayer who as of the end of the taxable year has not attained age 27. Any child to whom section 152(e) applies shall be treated as a dependent of both parents for purposes of this subsection.
Gross income does not include amounts referred to in subsection (a) to the extent such amounts—
For purposes of this section and section 104—
(2)amounts received from a sickness and disability fund for employees maintained under the law of a State or the District of Columbia,
shall be treated as amounts received through accident or health insurance.
For purposes of section 213(a) (relating to medical, dental, etc., expenses) amounts excluded from gross income under subsection (c) or (d) shall not be considered as compensation (by insurance or otherwise) for expenses paid for medical care.
For purposes of this section, the term “employee” does not include an individual who is an employee within the meaning of section 401(c)(1) (relating to self-employed individuals).
(h) Amount paid to highly compensated individuals under a discriminatory self-insured medical expense reimbursement plan
In the case of amounts paid to a highly compensated individual under a self-insured medical reimbursement plan which does not satisfy the requirements of paragraph (2) for a plan year, subsection (b) shall not apply to such amounts to the extent they constitute an excess reimbursement of such highly compensated individual.
A self-insured medical reimbursement plan satisfies the requirements of this paragraph only if—
A self-insured medical reimbursement plan does not satisfy the requirements of subparagraph (A) of paragraph (2) unless such plan benefits—
For purposes of subparagraph (A), there may be excluded from consideration—
(iv)employees not included in the plan who are included in a unit of employees covered by an agreement between employee representatives and one or more employers which the Secretary finds to be a collective bargaining agreement, if accident and health benefits were the subject of good faith bargaining between such employee representatives and such employer or employers; and
A self-insured medical reimbursement plan does not meet the requirements of subparagraph (B) of paragraph (2) unless all benefits provided for participants who are highly compensated individuals are provided for all other participants.
For purposes of this subsection, the term “highly compensated individual” means an individual who is—
The term “self-insured medical reimbursement plan” means a plan of an employer to reimburse employees for expenses referred to in subsection (b) for which reimbursement is not provided under a policy of accident and health insurance.
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) 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).
All employees who are treated as employed by a single employer under subsection (b), (c), or (m) of section 414 shall be treated as employed by a single employer for purposes of this section.
The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this section.
Notwithstanding any other provision of law, gross income includes benefits paid under section 2(a) of the Railroad Unemployment Insurance Act for days of sickness; except to the extent such sickness (as determined in accordance with standards prescribed by the Railroad Retirement Board) is the result of on-the-job injury.
For purposes of subsection (b), amounts paid (directly or indirectly) to the taxpayer from an accident or health plan described in paragraph (2) shall not fail to be excluded from gross income solely because such plan, on or before January 1, 2008, provides for reimbursements of health care expenses of a deceased plan participant’s beneficiary.
An accident or health plan is described in this paragraph if such plan is funded by a medical trust that is established in connection with a public retirement system and that—
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Tax changes triggered by federal health reform law