Addressing Church-Paid Medical Insurance Benefits
Prior to the enactment of the Affordable Care Act, many employers provided health benefits for their employees by paying health insurers directly for the cost of private health insurance, or by reimbursing employees for the substantiated cost of insurance premiums. The amounts paid by employers under such arrangements were nontaxable fringe benefits under section 106 of the tax code, which states that, with some exceptions, "gross income of an employee does not include employer-provided coverage under an accident or health plan."
The IRS affirmed the tax-free status of these arrangements in a 1961 ruling. It concluded that if an employer reimburses an employee's substantiated premiums for non-employer sponsored medical insurance, the payments are excluded from the employee's taxable income under section 106. IRS Revenue Ruling 61-146. The IRS added that this exclusion also applies if the employer pays the premiums directly to the insurance company.
Are these common and longstanding arrangements affected by the Affordable Care Act? Can employers continue to treat their payment of the health insurance premiums of employees under individual health insurance policies as a nontaxable fringe benefit? If they pay some or all of the premiums of their employees' private health insurance, are its payments a nontaxable fringe benefit as in prior years? And what about churches that drop their health coverage in favor of what they assume will be a lower cost alternative of paying some or all of their employees' premiums for insurance coverage purchased on a state exchange? Is this a nontaxable fringe benefit?