Our church has several employees who opt out of group health insurance and instead elect to participate in a group “health sharing plan.” It is my understanding that any out-of-pocket health expenses incurred by an employee are eligible for a Flexible Spending Account (FSA), provided they are included on the Internal Revenue Service’s (IRS) list of eligible reimbursed expenses.
Could you please clarify if the monthly “subscription” or “membership” cost for a health sharing plan paid by these employees could be covered as an FSA reimbursement?
And, more generally speaking, are there any situations in which a church pays the membership fee for a health sharing plan as a part of any tax-free fringe benefit plan?
Membership fees or subscription costs to a faith-based health sharing plan have not been considered as a medical expense under the current interpretation of “medical insurance.” In general, since a fee or subscription is not included in the definition of a medical expense, it is not an eligible expense for “health plans” provided to employees. As such, the payments for these plans are not eligible medical expenses available for reimbursement from an FSA.
We generally tell clients that if paid by the employer, the health sharing plan membership fee or subscription cost is taxable to the employee.
A potential exception to the above advice is when churches create a “self-insured” health plan. Sometimes the church will use the health sharing arrangement to fund the benefits it owes under its self-insured health plan.
To comply with the Affordable Care Act (ACA), the church must have an unlimited liability for health benefits under the self-insured health plan. Attorneys for health sharing plans sometimes recommend this approach as a way to incorporate health sharing plans into the church’s group health plan. According to some health sharing plans, a church’s payment of the membership fee is not taxable to the employee because the church’s self-insured plan is the sole beneficiary under the health sharing plan.
For this strategy to work, however, the church must draft and adopt a comprehensive health benefit plan meeting all the requirements for a self-insured health plan under the ACA. The church should retain an experienced benefits attorney to consult on and draft such a plan.
In June of 2020, the IRS issued a proposed rule changing the above advice. The new rule proposed regulations defining “insurance” for purposes of medical expenses to include heath sharing plan arrangements. While comments were gathered, and a public hearing was scheduled by the IRS, the regulations were never published. Therefore, the long-standing advice described above remains current until the IRS publishes the proposed regulations. With the current moratorium on new regulations, it is doubtful this will occur in the near future.
In summary, we tell churches to tax the membership fees or subscription costs of health sharing plans to employees unless the church has a qualifying self-insured health plan covering the costs.