Caution about ‘skinny’ health plans

NBC News published a detailed investigative report on “skinny health plans” this past week. Their conclusion is that consumers are confused about health insurance and that the Trump administration is adding to the confusion. As a guy who has handled more than 50,000 consumer communications about health insurance over many years, I agree with the published report’s analysis and conclusion. Yet this this consumer confusion existed back in the years before the Affordable Care Act so we can’t blame it all on Trump just because he has pushed the ‘skinny’ health insurance approach by executive order.

I tend to react furiously to false advertisement claims by health insurance marketers>

, often untrained telephone sales boiler rooms that notoriously mislead consumers. Recent claims that insurance plans are “ACA compliant” or “promoted by President Trump” are the most confusing to consumers lately.

Yet these alternate health plans do have their place in the market. Whether we call them “skinny health plans”

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, “short term medical insurance”, “limited benefit health insurance” or “core health insurance”, my position has always been that some coverage is better than none at all.

Most people who pay for their own insurance are not adequately covered by any single health insurance  plan, including the ACA health insurance policies. Whether an ACA plan or another plan works better for a normally healthy person is a function of the type of medical bills they will incur in the future; something we can seldom predict in advance.

In a perfect world

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, we would be covered by a government-influenced basic coverage and a supplemental policy through our employer or purchased individually. Although we are far from a perfect world, Freedom Benefits can help small business employers redesign their health plans to maximize the benefits to employees that are offered through a combination of public and private health plans.

Small business’ role in children’s health insurance

What role do small business owners have in providing health coverage for children of employees?

This question is increasingly significant as the federal government stalls and is apparently unwilling to issue funding for ‘CHIP’ programs that cover the children of nearly 9 million moderate income families that have historically been supported by the majority of lawmakers. Recent news reports indicate that the Senate is unlikely to approve the funding so states and employee benefits advisers like us are beginning to investigate alternatives. This article is meant to provide a preliminary checklist.

  1. Small businesses are not required to provide health insurance to employees.
  2. Businesses that do provide health insurance to employees are not required to provide it (or even make it available) to employees’ children.
  3. Businesses that do provide employee health coverage typically cover children on the same plan and under the same terms as the employees.
  4. CHIP often covers the children of parents who work in small businesses.
  5. Until 2010, the United States was making strong positive progress in providing health coverage to low income children. I covered this topic here in 2011. Most of these initiatives were replaced by the Affordable Care Act (ACA).
  6. The implementation of the ACA dominated coverage from 2012 until this year

    , 2017. This federal law treated all low income people equally (although coverage varied depending on state and local markets).

  7. The rollback of funding for ACA is the primary factor affecting children’s health insurance for lower income families in 2018.
  8. The cost of children’s health insurance is less than the cost of adult coverage
  9. In many cases small businesses are wise

    , considering all the options and current laws, to provide supplemental health coverage and avoid providing primary health coverage to employees and their dependents.

  10. Employee health plans can be modified to provide relief for employees’ children in the event of a cancellation of CHIP programs without disturbing other employer policies that are currently in force.

This blog post offers generalized comments for public presentation. Discussion is not customized for each state’s laws. Some of these points may not apply to your firm. Please seek individual guidance that applies to your firm and your state’s laws.

Concerns of small businesses in response to the president’s executive order on health care

On October 12, 2017 the president issued an executive order that directed federal government agencies to explore ways to loosen niche types of health insurance. My annotated copy of the execuive order is posted on my web site at

The executive order does not address these immediate concern to small businesses and individuals:

1) Indicate any change in state insurance regulations that prohibit the use of short term medical or limited benefit insurance plans within its borders. This is of special importance in states with the most restrictive and most expensive insurance.

2) Predict how state insurance regulators will react to the sale of already approved limited benefit or short term medical insurance across state borders to residents within its jurisdiction.

3) Indicate how state insurance prohibiting the use of association insurance plans will be affected or persuaded to ease in conjunction with this executive order.

Freedom Benefits is working with insurance companies

, business associations and individual business clients to address these issues and close the gap in knowledge where specific health plan solutions are needed. We are especially focused on solutions for New Jersey small businesses since this state has the most restrictive insurance laws in the nation in this market niche.

Freedom Benefits acts as an adviser but not an insurance company

, agent, broker, insurance exchange, association health plan or other entity affected by the executive order. We may be paid paid to perform support functions for any of these entities.

Profiting from the new Trump administration health plan rules

New opportunities for small business planning

(This post is speculative based on an announcement that is expected in the near future. The content is therefore valid only if regulations are changed as predicted).

Later this week the Trump administration is expected to roll back  range of restrictive regulations on health insurance that will open the door to new opportunities for saving. These are actuarial principles that Freedom Benefits has endorsed since the 1980s.

The core concept is shockingly refreshing: small businesses should focus on serving the immediate needs of their most productive workers.  The new regulations allow and even encourage small business employers from trying to solve all of our ailing health car system’s woes. That means giving up and releasing outlier health care risks. It means analyzing and addressing the core medical needs of your small group of employees.

The new plans will make broad use of short term medical insurance for new or transient employees who do not have pre-existing medical conditions. This one change can save an average of half of the insurance cost compared to Obamacare era health plans.

Small businesses will again be attracted to limited benefit mini-med insurance that focus on the “sweet spot” of medical costs incurred by the majority of employees. The most important difference is that they eliminate the deductibles that employees hate. These plans are priced at least 15% lower than traditional major medical plans but have some glaring holes in coverage, like prescription drugs

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, that some people have come to expect. Fortunately today’s flexible small business health plans like those offered by Freedom Benefits allow individual employees can weigh the pros and cons on an individual basis.

High tech, construction and agricultural businesses that traditionally rely on temporary international workers will save money by using insurance that is specifically designed for inbound immigrants.

Most importantly

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, employers will be empowered to design health benefits that are independent of insurance companies. Health Reimbursement Arrangements, Health Savings Accounts and Flexible Spending Accounts will play a larger role for employers who want to take control and directly address employees’ health care concerns. Freedom Benefits offerers these customized plans on an affordable basis that fit the budget of small business employers.


Three approaches to 2017 health insurance rate increases

Small business facing steep health insurance rate increases for 2017 health insurance may take one of three possible approaches to the problem:
1. Some will drop the group coverage and send employees to the exchange. Some employers will increase employee pay to compensate for the change. A few will attempt to reimburse employees for insurance at significant risk of IRS penalties.
2. Some will switch to a bronze insurance plan with a Health Savings Account. This generally saves some money and increases the overall benefit payout ratio of the health plan.
3. Firms with more than 20 employees may consider using a type of self-insurance with hybrid insurance plans. It is impossible to know whether this will save money until after all the employee claims are processed for the year.

With rate increases threatening to be more than 20% in some states

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, I doubt that many firms will renew existing insurance coverage without changes.

When to avoid small business group health insurance

Employer-based group health plans are usually the preferred method of delivery of health care financing because of current laws and market efficiencies. But there are cases where individual insurance is a better option.

Employer-based employee benefit plans are usually preferred way to provide health insurance and supplemental health benefits to employees. In an ideal setting

, group health insurance allows for the highest quality coverage to be made available at a competitive price through a combination of employer contributions and voluntary employee salary reductions. The use of common employee benefit plans makes the health plan a pre-tax benefit which significantly reduces the net cost.


, there are exceptions. Certain work environments do not provide a suitable setting for employer-based insurance. The following list provides examples of situations where group health plans will not work. In those cases individual insurance exchange is a better option.

1. There is a high level of tension or distrust between the employer and employees. Certain industries are notorious for unsuccessful employee benefit plans and, unfortunately, that problematic climate is likely beyond our immediate control.

2. The employer does not offer or contribute to at least a basic health insurance plan. Most group health insurance companies require that the employer pay a portion of the cost in order to financially stabilize the insurance policy and deter adverse selection.

3. Payroll deduction accounting is not available. While we are able to help with the set up qualified benefits under any payroll system, the fact is that some employers do not use a payroll accounting system and other that do use a payroll system do not maintain a good working relationship with the service provider.

4. The employer is unwilling to pay the cost of setting up a pre-tax qualified plan to reduce benefit costs for the employees. The initial start-up cost is typically $300 at Freedom Benefits and similar additional expenses recur each year.

5. Management does not understand the benefit plans and does not take the time to learn how they work. An effective benefit plan relies on endorsement and a mentorship type environment within the workplace.

6. The workplace does not allow time and place for employees to learn about benefits. This is the underlying reason that group health plans do not succeed in some industries.

When one or more of these conditions are present, a group health plan will not likely be successful. In those cases the employer should focus on steering employees to a health insurance exchange and may want to consider paying for health benefits through the regular paycheck.

An employer may wish to consider any of the voluntary benefit programs offered by Freedom Benefits that combine individually selected health insurance with the tax advantages of group health plans.


Three simple steps to improve 401(k) results

Are you concerned about the fees in your 401(k) plan? How do you get the best value for your money and is your 401(k) on target to deliver the benefits you expect?

401(k) plan participants are expected to pay much more attention to the fees and performance of their retirement accounts after August 2012 when new federal regulations require additional disclosures to all 401(k) plan participants. We believe that the only logical approach to improve 401(k) plan results is through independent advice – separate from the firms that provide retirement plan and investment services. A simple three step analysis, review and planning exercise will address these concerns and put your retirement plan back on the right track.

Ask questions

The Department of Labor prepared this ten point checklist to help 401(k) plan participants gain an understanding of these fees and potential areas for improvement:

  1. What investment options are offered under your company’s 401(k) plan?
  2. Do you have all available documentation about the investment choices under your plan and the fees charged to your plan?
  3. What types of investment education are available under your plan?
  4. What arrangement is used to provide services under your plan (i.e., are any or all of the services or investment alternatives provided by a single provider)?
  5. Do you and other participants use most or all of the optional services offered under your 401(k) plan

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    , such as a participant loan program and insurance coverage?

  6. If administrative services are paid separately from investment management fees, are they paid for by the plan, your employer or are they shared?
  7. Are the investment options tracking an established market index or is there a higher level of investment management services being provided?
  8. Do any of the investment options under your plan include sales charges (such as loads or commissions)?
  9. Do any of the investment options under your plan include any fees related to specific investments, such as 12b-1 fees, insurance charges, or surrender fees, and what do they cover?
  10. Does your plan offer any special funds or special classes of stock (generally sold to larger group investors)?

Get independent advice

Plan participants should have access to independent 401(k) plan advice (an adviser not affiliated with the company that provides services to the 401(k) plan or its investments). An independent adviser typically compares the fees and services of your plan in comparison to similar fees and services on comparable plans in order to arrive at any  recommendations designed to lower fees and boost performance for the participants. More importantly, an independent adviser helps plan participants focus on a “big picture” assessment of whether the current accounts are on target to meet the participant’s overall expectations of a secure retirement.

Measure your progress

It is important to periodically re-evaluate your retirement planning in light of overall life changes. Freedom Benefits offers individual consultations to delve into these issues in more detail. A simple but highly effective interactive software program called “Taking the mystery out of retirement planning” is incorporated into our one-on-one discussions and group workshops for 401(k) plan participants. This “mini-planning” process takes only about an hour but delivers big results.

By taking these three simple steps:

  1. question 401(k) fees and performance
  2. access an independent advisor
  3. participate in a retirement planning evaluation

it is possible to significantly improve performance and satisfaction with you 401(k) plan.

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Tax changes triggered by federal health reform

How the 2010 federal health reform laws changed the taxation of health benefits, health insurance and related benefit plans

Health care reform legislation passed in 2010 added new taxes and changed other aspect of tax law. This article summarizes the federal tax-related items from the health care reform legislation. Note that not all of the tax changes relate directly to health insurance or health benefits but were still included as part of the 2010 health reform laws. This article does not address state tax changes that followed as a result of the federal law.

Tax changes effective in 2010

Sec. 40 – Change to cellulosic biofuel producer credit

Excludes fuels that are more than 4% (determined by weight) water and sediment in any combination or have an ash content of more than 1% from the definition of cellulosic biofuel.

Sec. 45R – Small business tax credit

Small businesses with 25 or fewer employees and average annual wages of $50,000 or less would be eligible for a credit of up to 50% of nonelective contributions the business makes on behalf of their employees for health insurance.

Sec. 105(b) – Excluding from income amounts received under a health insurance plan

The definition of “dependent” now includes any child of the taxpayer who has not yet reached age 27.

Sec. 162(l)(1) Self-employed health insurance deduction

The definition of “dependent” now includes any child of the taxpayer who has not yet reached age 27.

Sec. 401(h) Benefits for retirees

The definition of “dependent” now includes any child of the taxpayer who has not yet reached age 27.

Sec. 501(c)(9) Benefits provided to members of a VEBA

The definition of “dependent” now includes any child of the taxpayer who has not yet reached age 27.

Secs. 501(r) – Charitable hospitals

New requirements for hospitals operating under Sec. 501(c)(3)

, also affects Section 6033(b)(15).

Sec. 5000B – Tax on indoor tanning services

A new 10% tax on amounts paid for indoor tanning services.

Sec. 6103 – Return information disclosure

Allows the IRS to disclose certain taxpayer return information if the taxpayer’s income is relevant in determining the amount of the tax credit or cost-sharing reduction, or eligibility for participation in the specified state health subsidy programs.

Sec. 7701(o) – Codification of the economic-substance doctrine

Creates the economic-substance doctrine under the law and makes underpayments due to transactions that do not have economic substance subject to the Sec. 6662 accuracy-related penalty.

Adoption credit and credit for adoption-assistance programs

Maximum adoption credit was increased and, for adoption-assistance programs, the maximum exclusion was increased. Expired at end of 2012.

Tax changes effective in 2011

Sec. 125 – SIMPLE cafeteria plans for small business

An eligible small employer is provided with a safe harbor from the nondiscrimination requirements for cafeteria plans as well as from the nondiscrimination requirements for specified qualified benefits offered under a cafeteria plan.

Sec. 223 – Tax on health savings account (HSA) distributions

The tax on distributions from an HSA or an Archer medical savings account (MSA) that are not used for qualified medical expenses is increased to 20% of the disbursed amount.

Sec. 223 – Restrictions on use of HSA and FSA Funds

Amounts paid for over-the-counter medications will no longer be reimbursable from HSAs, Archer MSAs, health FSAs, or health reimbursement arrangements.

Annual fee on pharmaceutical manufacturers and importers

Fee on each covered entity engaged in the business of manufacturing or importing branded prescription drugs for sale to any specified government program or pursuant to coverage under any such program.

Tax changes effective in 2012

Sec. 501(c)(3) – Community health needs assessment

New requirements applicable to hospitals, regarding conducting a community health needs assessment, adopting a written financial-assistance policy, limitations on charges, and collection activities. Also affects Section 6033(b)(15).

Sec. 4375 – Fees on health plans

A fee is imposed on each specified health insurance policy.

Sec. 6051(a)(14) – Information reporting

Employers must disclose the value of the employee’s health insurance coverage sponsored by the employer on each employee’s annual Form W-2. The effective date was later delayed until 2013 for most employers.

Tax changes effective in 2013

Sec. 139A – Deductions for federal subsidies for retiree prescription plans

Eliminates the rule that the exclusion for subsidy payments is not taken into account for purposes of determining whether a deduction is allowable for retiree prescription drug expenses.

Sec. 125(i) – Health flexible spending arrangements (FSAs)

The maximum amount available for reimbursement of incurred medical expenses under a health FSA for a plan year can not exceed $2,500.

Sec. 213 – Medical care itemized deduction threshold

Threshold for the itemized deduction for unreimbursed medical expenses is increased from 7.5% of adjusted gross income (AGI) to 10% of AGI for regular income tax purposes. This change is delayed until 2017 for certain taxpayers.

Sec. 1411 – Medicare tax on investment income

Imposes a tax on individuals equal to 3.8% of the lesser of the individual’s net investment income for the year or the amount the individual’s modified AGI exceeds a threshold amount.

Sec. 3101 – Additional hospital insurance tax on high-income taxpayers

Employee portion of the Medicare hospital insurance tax part of FICA is increased by 0.9% on wages that exceed a threshold amount.

Sec. 4191 – Excise tax on medical device manufacturers

A tax equal to 2.3% of the sale price is imposed on the sale of any taxable medical device by the manufacturer, producer, or importer of the device.

Tax changes effective in 2014

Time for payment of corporate estimated taxes for 2014

Corporations with assets of at least $1 billion,had estimated tax payments due in July

, August, or September 2014 increased.

Expanded 1099 reporting

This change was repealed by the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011, P.L. 112-9.

Sec. 36B – Premium-assistance credit

Refundable tax credits that eligible taxpayers can use to help cover the cost of health insurance premiums for individuals and families who purchase health insurance through a state health benefit exchange.

Sec. 125 – Cafeteria plans

A qualified health plan offered through a health insurance exchange is a qualified benefit under a cafeteria plan of a qualified employer.

Sec. 4980H – Employer responsibility for insurance

An applicable large employer that does not offer coverage for all its full-time employees, offers minimum essential coverage that is unaffordable, or offers minimum essential coverage that consists of a plan under which the plan’s share of the total allowed cost of benefits is less than 60%, is required to pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee.

Sec. 6055 – Reporting requirements

Requires insurers and employers who self-insure that provide minimum essential coverage to employees to report certain health insurance coverage information to both the covered individual and to the IRS.

Tax changes effective in 2018

Sec. 4980I – Excise tax on high-cost employer plans

The “Cadillac tax” is an excise tax on coverage providers if the aggregate value of employer-sponsored health insurance coverage for an employee (including, for purposes of the provision, any former employee, surviving spouse, and any other primary insured individual) exceeds a threshold amount.

Other resources:

Taxation of amounts received through health plans (2012)


Tax free treatment of amounts received through health plans

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
(1) are attributable to contributions by the employer which were not includible in the gross income of the employee, or
(2) are paid by the employer.
(b) Amounts expended for medical care
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.
(c) Payments unrelated to absence from work
Gross income does not include amounts referred to in subsection (a) to the extent such amounts—
(1)constitute payment for the permanent loss or loss of use of a member or function of the body, or the permanent disfigurement, of the taxpayer, his spouse, or a dependent (as defined in section 152, determined without regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), and
(2)are computed with reference to the nature of the injury without regard to the period the employee is absent from work.
[(d) Repealed. Pub. L. 98–21, title I, § 122(b),Apr. 20, 1983, 97 Stat. 87]
(e) Accident and health plans
For purposes of this section and section 104—
(1)amounts received under an accident or health plan for employees, and
(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.
(f) Rules for application of section 213
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.
(g) Self-employed individual not considered an employee
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
(1) In general
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.
(2) Prohibition of discrimination
A self-insured medical reimbursement plan satisfies the requirements of this paragraph only if—
(A)the plan does not discriminate in favor of highly compensated individuals as to eligibility to participate; and
(B)the benefits provided under the plan do not discriminate in favor of participants who are highly compensated individuals.
(3) Nondiscriminatory eligibility classifications
(A) In general
A self-insured medical reimbursement plan does not satisfy the requirements of subparagraph (A) of paragraph (2) unless such plan benefits—
(i)70 percent or more of all employees, or 80 percent or more of all the employees who are eligible to benefit under the plan if 70 percent or more of all employees are eligible to benefit under the plan; or
(ii)such employees as qualify under a classification set up by the employer and found by the Secretary not to be discriminatory in favor of highly compensated individuals.
(B) Exclusion of certain employees
For purposes of subparagraph (A), there may be excluded from consideration—
(i)employees who have not completed 3 years of service;
(ii)employees who have not attained age 25;
(iii)part-time or seasonal employees;
(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
(v)employees who are nonresident aliens and who receive no earned income (within the meaning of section 911(d)(2)) from the employer which constitutes income from sources within the United States (within the meaning of section 861(a)(3)).
(4) Nondiscriminatory benefits
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.
(5) Highly compensated individual defined
For purposes of this subsection, the term “highly compensated individual” means an individual who is—
(A)one of the 5 highest paid officers,
(B)a shareholder who owns (with the application of section 318) more than 10 percent in value of the stock of the employer, or
(C)among the highest paid 25 percent of all employees (other than employees described in paragraph (3)(B) who are not participants).
(6) Self-insured medical reimbursement plan
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.
(7) 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) paid to a highly compensated individual by a plan which fails to satisfy the requirements of paragraph (2)

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, 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).
(8) Certain controlled groups, etc.
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.
(9) Regulations
The Secretary shall prescribe such regulations as may be necessary to carry out the provisions of this section.
(10) Time of inclusion
Any amount paid for a plan year that is included in income by reason of this subsection shall be treated as received or accrued in the taxable year of the participant in which the plan year ends.
(i) Sick pay under Railroad Unemployment Insurance Act
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.
(j) Special rule for certain governmental plans
(1) In general
For purposes of subsection (b)

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, 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.

(2) Plan described
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—
(A)has been authorized by a State legislature, or
(B)has received a favorable ruling from the Internal Revenue Service that the trust’s income is not includible in gross income under section 115.

Other resources:

Tax changes triggered by federal health reform law


A summary of tax issues related to employer-provided health benefits

Taxation of employer-provided health benefits is often a misunderstood topic especially in the years after implementation of the Affordable Care Act market reform provisions. Yet the fundamental tax treatment of health plans and health benefits has not changed in decades.

Four key factual issues now control the tax treatment of employer-provided health benefits under U.S. law:

  1. Whether the health benefit was provided through insurance or outside of insurance,
  2. If provided through insurance, whether the insurance was ACA compliant, exempted, or non-compliant,
  3. Whether the employer’s health plan meets legal requirements. (I used to write “whether an employer plan exists” but now presume that all employer-provided health benefits are part of a “plan” for tax purposes,
  4. Whether the benefit involved employee contributions as a salary reduction.

There are different components of tax law to consider that affect employer-provided health benefits including:

  1. Deductibility of the expense by the employer under IRC Section 162 (ordinary business expenses). Almost all employee health plan expenses do qualify as an ordinary tax-deductible business expense for the employer.
  2. Taxability of benefits to the employee, as determined by IRC Section 3121 (definition of wages). In the past almost all employer-provided health benefits were received tax-free by the employee but this is no longer presumed to be the case following implementation of the Affordable Care Act.
  3. Excise taxes imposed on non-compliant employer health plans under IRC Section 4980D. This is the new ‘hot issue’ for employers in 2014 following implementation of the Affordable Care Act. Many employer health plans are subject to a new 10% excise penalty

    , a few will be subject to much higher penalty amounts.

  4. Taxation for FICA and FUTA and state income taxes. This tax treatment may be different than the tax treatment for federal income taxes.

There are many resources available for tax advisers and business owners. A few are listed here:

IRS – Koupit Priligy

,-Employer’s-Tax-Guide-to-Fringe-Benefits”>Publication 15-B

IRS – Employer Health Care Arrangements

Freedom Benefits – Small business health plan compliance checklist 

Novak, Tony – Taxation of health insurance

Novak. Tony – 18 Things Small Businesses Must Know About Health Reimbursement Arrangements (HRAs)