This section discusses employer-provided health insurance, including administration, funding, tax consequences and legal compliance. In addition, it outlines some of the popular policies and options. The U.S. Department of Labor has an extensive site devoted to Consumer Information on Health Plans & Benefits. For a discussion of life and disability insurance, see our Life Insurance section.
Fact sheets, booklets, and other health plan information from the Department’s Employee Benefits Security Administration (EBSA).
Publications and other materials to assist employers and employee benefit plan practitioners in understanding and complying with the requirements of the Employment Retirement Income Security Act (ERISA) for the administration of pension and health plans.
Compliance Assistance Guide: Health Benefits Under Federal Law
Provides 10 key compliance considerations for group health plans.
For most employees, health care is the most important employer-provided fringe benefit. It is for this reason that many employers offer medical insurance coverage, even though such coverage is generally not required by law. In fact, most companies with over 100 employees offer some type of health insurance.
Retiree medical benefits are a matter of great concern to both employers and employees. For the employer who is committed to providing such benefits, rising costs cause concern. Costs are rising as people are living longer.
The first action the employer will want to take is to review its commitment to the employee. One major concern is whether it is binding or not. For example, if the agreement is found in a union contract, and is clearly found to be in force, then an obligation exists—versus something that may be interpreted to be implied in a manual.
It has been held that the plan description (SPD) required by ERISA and distributed to employees controls. If the SPD reserves the right of the employer to alter, modify, or eliminate the plan—which many do—this may override any implied promise of lifetime or no-cost medical benefits contained in an employee manual or brochure.
Review terms used in manuals or brochures to make sure that the intention of the employer is being properly communicated. If promises are made, their binding nature could be costly.
Each employer should make a cost-benefit analysis in terms of its own workforce, age categories, turnover rate, health state, and all other factors bearing on the present and future costs. On the benefit side, the employer will want to consider what is being offered by competitors tapping the same labor pool and what effect this will have on recruitment and retention of talent.
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 some states 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 the State at the same rate that commercial insurers licensed in the state are required to reimburse hospitals for inpatient services for individuals not covered by a group health plan. The same rule may apply to plans that provide inpatient hospital services through a health maintenance organization (HMO), a Blue Cross and Blue Shield corporation, or other carriers.
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.
Although, to be deductible by an individual, medical expenses generally must rise above a percentage of Adjusted Gross Income (AGI) “floor,” employer-provided reimbursements do not have to exceed a certain floor.
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 employee’s taxable income (or were paid directly by the employer).
Employees may be entitled to an itemized deduction for expenses paid for “medical care” if that care is not covered by the employer’s health plan (or if the employee is not covered by any health plan). Such expenses may be paid for the medical care of the employee, a spouse, or a dependent.
The term “medical care” is broadly defined in the tax law to include amounts that may not even be covered under a health insurance plan. The IRS defines which expenses will be considered to be incurred for “medical care” in Publication 17, Your Federal Income Tax and Publication 502, Medical and Dental Expenses. Use this IRS tool to help you determine how to claim qualified medical and dental expense deduction on Schedule A (Form 1040).
It is essential for employers to continually refine their health management strategies. An increase in health options, new legislation, and a changing workforce are transforming the option of redefining employee health insurance into a necessity.
The traditional American concept of “family” has undergone dramatic change. Contemporary families now include not only the traditional married couple with children but also the unmarried opposite- or same-sex couple, adoptive families, step-families, and grandparents raising grandchildren. In recognition of the diversity in family representations, a growing number of employers offer health insurance benefits to their employees’ domestic partners/spousal equivalents. Indeed, applicable law may require it.
Federal law requires most employers with group health plans to offer employees and their spouses and dependents a temporary period of continued health care coverage if their employer-provided coverage should cease. These continuation requirements are commonly referred to as COBRA (the Consolidated Omnibus Budget Reconciliation Act of 1985).
COBRA contains requirements for group health plans to provide continuation coverage to covered employees and their “qualified beneficiaries” upon the occurrence of a “qualified event.”
Generally, an employer with 20 or more employees must continue to offer coverage in their group health plan to certain former employees, retirees, spouses, and dependent children. The length of continuation coverage offered depends on the “qualifying event.”
Under COBRA, the affected employee or family member may qualify to keep their group health plan benefits for a set period of time, depending on the reason for losing the health coverage. For more on the COBRA requirements, see the section on Employee Termination.
COBRA and HIPAA still play a role in protecting insurance benefits for many; but many of the protection provisions of COBRA and HIPAA have been largely eclipsed by PPACA (or ACA, also known as Obamacare). See the ACA section for more on Obamacare.
The Health Insurance Portability and Accountability Act (HIPAA) offers protections for workers and improves portability and continuity of health insurance coverage.
- What is a fee-for-service plan?
- What is the difference between an HMO and a PPO?
- Are there any legal requirements for setting up a health plan?
- What are the tax consequences to the employer of providing health insurance?
- Are health insurance benefits taxable to the employee?
- Which expenses qualify as “medical care”?
- What is COBRA?
- How does an employee become eligible for COBRA benefits?
- What is the ACA or Obamacare?
- For most employees, health care is the most important employer-provided fringe benefit.
- The premiums paid by the employer for health insurance coverage and the benefits received under the plans are generally excluded from the employee’s income.
- An employer’s costs associated with its employee health plan generally will be deductible as an ordinary cost of doing business.
- Unlike other employer-provided benefits, such as pensions, an employee is usually entitled to begin receiving health benefits shortly after commencing employment.
- Subject to certain limitations, expenses incurred for transportation and lodging away from home essential to medical care are treated as medical care expenses.
- Checklist of Benefit Options
- Vision Care Benefits: Summary Description
- Summary Annual Report for Benefits Plan
- Short-Term Disability Benefits Policy
- Severance Pay Policy
- Sample Comprehensive Medical Expense Plan Policy
- Purchase of Company Products Policy Statement
- Model Domestic Partner Health Benefits Policy
- Long-term Disability Benefits Policy
- Comprehensive Medical Expense Plan Policy
- Pre-admission Certification Program: Physician Information and Consent Form
- Pre-admission Certification and Continued Stay Review Program: Medical Review Request
- Hospital Pre-admission Certification Program: Description
- Notice of Disapproval of Initial Claim
- Notice of Claims Administrator’s Approval of Initial Claim
- Checklist to Ensure That Claims Are Handled in a Timely Manner
- Travel Accident Insurance Plan
- Health Care Enrollment
- Description of Premium Conversion Plan
- Group Life Insurance Plan
- Waiver of Life Insurance Coverage
- Waiver of Group Life Insurance and Dependent’s Group Life Insurance
- Waiver and Release of Liability for Company Athletic Events
- Spouse’s Consent to Waive a Qualified Pre-retirement Survivor Annuity under a Defined Contribution Plan
- Spouse’s Consent to Waive a Qualified Pre-retirement Survivor Annuity under a Defined Benefit Plan
- Spouse’s Consent to Waive a Qualified Joint and Survivor Annuity
- Election to Waive Straight Life Annuity
- Election of Health Plan Continuation Coverage
- COBRA Notice to Beneficiaries Newly Added to Health Plan
- COBRA Notice in Response to Employment Termination or Other Qualifying Event
- Health Insurance Claim Form
- Sample Comprehensive Medical Expense Plan Policy
- Medical Plan Selection and Enrollment Form
- Preadmission Certification and Continued Stay Review Program: Medical Review Request
- Statement of Marriage or Domestic Partnership
- Affidavit of Marriage/Spousal Equivalency
- Model Plan Overview for Employees’ Spousal Equivalents’ Health Coverage
- Model Domestic Partner Health Benefits Policy
- Sample Health Care Enrollment Statement
- Notice of Termination of Eligibility for Spousal Equivalents’ Health Coverage
For More Information
- Compliance Assistance
- Consumer Information on Health Plans
- Continuation of Health Coverage (COBRA)
- Employee Retirement Income Security Act (ERISA)
- Health Benefits Education
- Mental Health Benefits
- Participant Rights
- Plan Information
- Portability of Health Coverage (HIPAA)
- Fee-for-Service Plans
- Health Maintenance Organization (HMO)
- Point of Service Plan (POS)
- Preferred Provider Organization (PPO)
- Tax Consequences to the Employer
- Tax Consequences to the Employee
- Qualifying Medical Care
- Health Insurance for Children
- For additional terminology, please refer to the Glossary.