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IRS Addresses Employer-Provided Health Insurance

The issue regarded employers who pay for insurance by reducing employees' salaries.

Background. Many employers provide health insurance for their employees. This is a nontaxable fringe benefit under section 106 of the tax code. But what if an employer pays for this insurance by reducing the salaries of its employees? Must the employer report the salary reductions as taxable income, or are the reductions nontaxable? The IRS addressed this question in a recent ruling. An employer provided health coverage for its employees through a group health insurance policy. The employer reduced its employees' salaries and applied the salary reduction amounts to the payment of the health insurance premiums for the employees. In other words, employees received lower salaries in exchange for employer-provided health coverage.

The IRS concluded that the amount by which an employee's wages were reduced to cover the employer's payment of health insurance premiums was nontaxable. It based this ...

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  • February 1, 2002

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