Tax Considerations

As long as the employer's group health plan satisfies certain nondiscrimination and qualification requirements, the premium it pays for such coverage and the benefits received from it are generally excluded from the employee's income. Moreover, an employer's costs associated with its employee health plan generally will be deductible as an ordinary and necessary cost of business, regardless of the ultimate tax treatment of the benefits to the recipients.

Insurance premiums and other costs associated with an employer's health plan generally will be deductible for tax purposes, as an "ordinary and necessary" cost of doing business, regardless of the ultimate tax treatment of the benefits to the recipient.

NOTE: Group health plans must often comply with state law, as well. For example, in New York, an employer may not claim a deduction for any amounts paid or incurred in connection with a group health plan if the plan fails to reimburse hospitals for inpatient services provided in New York State at the same rate that commercial insurers licensed in New York are required to reimburse hospitals for inpatient services for individuals not covered by a group health plan. The same rule applies to plans that provide inpatient hospital services through a health maintenance organization (HMO) or through a Blue Cross and Blue Shield corporation.

The value (premiums paid) of health insurance coverage is generally not considered income to the employee, and is therefore not included in income for tax purposes. Similarly, the reimbursements for actual medical expenses paid by the insurance carrier are generally not included in income.

However, amounts received by an employee as payment for personal injuries or sickness under an accident or health insurance plan, are included in gross income, to the extent they are attributable to employer-paid premiums that were not included in the employeeÿs taxable income (or were paid directly by the employer).