If a C-Corporation employee is covered thru their spouse's employer plan, of which their spouse pays the premium thru a pre-tax payroll deduction and the C-Corporation reimburses the employee for these premiums is this taxable income to the employee?

asked 03 Dec '10, 03:59

Linette's gravatar image

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edited 10 Dec '10, 04:24

TaxQueries's gravatar image

TaxQueries ♦♦

Seems as though this was asked and answered. Perhaps on another board. In order for reimbursement for medical expense to be excluded from income, the employee has to have paid it. This is going to sound strange, but the employee did not pay for the spouse's insurance premium - nor did the employee's spouse. The spouse's employer paid for it. The spouse elected to take a reduced salary in order to receive the medical insurance pre-tax. The amount of the salary reduction used to pay for medical insurance is considered to be paid by the employer, not the spouse.

An example might help. Spouse's salary is $4000 per month. Employer provides health insurance, but spouse's share of the health insurance premium is $300 per month. The employer pays any remaining premium. Spouse elects to reduce salary by $300 per month so that the $300 is pre-tax. Taxable salary is now $3700 per month.

Change the facts slightly - Spouse's salary is $3700 per month and employer pays for health insurance.

In both situations, the C-Corp pays the Employee $200 per month because the employee opts out of the employer's insurance plan due to being covered under Spouse's employer's plan.

The only difference in the two situations is the $300 deduction appears on the Spouse's pay stub in the first case. In the second case, the amount paid for the insurance does not appear anywhere, so the question of excluding the $200 from employee's taxable pay never comes up. It is cash received in lieu of a tax exempt benefit and it is taxable income.

The agreement between the spouse and the spouse's employer does not affect the nature of the payment to the employee.

Another way to look at it is that in order for the reimbursement to be excluded from income, the expense has to otherwise qualify for deduction as a medical expense by the employee on Sch A of Form 1040. The code and regulations specifically prohibit "double dipping" - that is deducting expenses that were paid or reimbursed with pre-tax dollars. That is the reason expenses reimbursed by insurance are not deductible. Thus, reimbursement of a non-deductible expense (such as the pre-tax deduction from the spouse's pay) is taxable income.


answered 04 Dec '10, 19:03

Pat%20Haggerty's gravatar image

Pat Haggerty
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Asked: 03 Dec '10, 03:59

Seen: 10,920 times

Last updated: 10 Dec '10, 04:24