Q&A: Reimbursing Group Health Insurance Premiums Paid By a Spouse’s Employer

Reimbursing group health insurance premiums is complicated but it can be done if certain steps are followed.

Q: Is there a way to reimburse a church employee for the group health insurance premiums paid by a spouse either through the spouse’s payroll withholding or the spouse’s employer flexible spending plan (Section 125 Plan)?

You already know that health insurance premium reimbursements are taxable for 2014 unless the plan is coupled with a qualifying group health insurance plan. But the rules do not require the church to provide the qualifying group health insurance plan. A qualifying group health insurance plan can be the plan where the spouse is employed elsewhere and pays the premiums either through his or her employer’s payroll withholding or through the employer’s flexible spending plan (Section 125 Plan).

The steps to secure tax-free reimbursement of group health insurance premiums are complicated but can be done. I emphasize the word “group” because no way exists to reimburse an employee for premiums incurred purchasing an individual health insurance policy (including those purchased through an exchange). Also, if the spouse is paying the premiums through a flexible spending plan, then the church cannot reimburse the premiums on a tax-free basis. In other words, the employee does not get to stack tax-free provisions from the two employers to create a double benefit.

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The five steps to secure tax-free reimbursement of group health insurance premiums are:

1. The church must establish a written medical expense reimbursement plan that authorizes the reimbursement of group health insurance premiums paid by a spouse. This plan must be approved by your church’s governing body and must be available to all full-time employees (working 30 hours or more per week) on a nondiscriminatory basis.

2. The employee must voluntarily waive their right to participate in the church’s group health insurance plan. In other words, the employee must reject your church’s group health insurance plan. Also, the church cannot offer the employee any financial incentives to enroll in the spouse’s plan instead of the church’s group plan. For example, the church cannot offer its employee a raise or a bonus in lieu of enrolling in the church’s group plan, even if the employee’s rejection of the church’s plan saves the church money.

3. The church must secure written proof from the spouse’s employer that the insurance premiums for group health insurance are paid with after-tax dollars. This means if the spouse pays the dependent or spousal coverage through a flexible spending plan (Section 125 Plan), then the church may not reimburse the premiums on a tax-free basis.

4. The church must secure written certification from the spouse’s group insurance carrier that the plan qualifies under the Affordable Care Act as a group health insurance plan. If you do not have the written certification from the carrier, then the insurance is assumed to be non-qualifying and the church may not reimburse the premiums on a tax-free basis.

5. The employee must submit proof of each payment of the premiums with after-tax dollars to receive the tax-free reimbursement.

Frank Sommerville is a both a CPA and attorney, and a longtime Editorial Advisor for Church Law & Tax.

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