Health Insurance

<div class="Section1"><br /> <br /> Nondiscrimination requirements apply to self-insured health benefits, although the IRS announced in Notice 2011-1 on December&nbsp;22, 2010, that compliance with nondiscrimination rules for health insurance plans will be delayed until regulations or other administrative guidance has been issued. This guidance remains pending. The IRS indicated that the guidance will not apply until plan years beginning in specified periods after guidance is issued. Some plans will be grandfathered.<br /> <br /> Benefits under a self-insured plan generally are excludable from an employee&rsquo;s gross income ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="8794">8794</a>). If a self-insured medical expense reimbursement plan or the self-insured part of a partly-insured medical expense reimbursement plan discriminates in favor of highly compensated individuals, certain amounts paid to highly compensated individuals are taxable to them.<br /> <br /> A self-insured plan is one in which reimbursement of medical expenses is not provided under a policy of accident and health insurance.<a href="#_ftn1" name="_ftnref1">¹</a> According to regulations, a plan underwritten by a cost-plus policy or a policy that, in effect, merely provides administrative or bookkeeping services is considered self-insured.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> A medical expense reimbursement plan cannot be implemented retroactively. To allow this would render meaningless the nondiscrimination requirements of IRC Section&nbsp;105.<a href="#_ftn3" name="_ftnref3">³</a><br /> <br /> A self-insured plan may not discriminate in favor of highly compensated individuals either with respect to eligibility to participate (<em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="338">338</a>) or benefits (<em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="339">339</a>).<br /> <br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 105(h)(6).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.105-11(b).<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; <em>Wollenburg v. U.S.</em>, 75 F. Supp.&nbsp;2d 1032 (D.C Neb. 1999); <em>American Family Mut. Ins. Co. v. U.S.</em>, 815 F. Supp.&nbsp;1206 (W.D. Wis. 1992). <em>See also</em> Rev. Rul. 2002-58, 2002-38 IRB 541.<br /> <br /> </div></div><br />

<div class="Section1">Yes. The IRS has ruled that premiums paid on an overhead expense disability policy, a special type of contract that reimburses professionals or owner-operators for overhead expenses actually incurred during periods of disability, are deductible as a business expense and the proceeds are taxable.<a href="#_ftn1" name="_ftnref1">¹</a> The ruling relates to self-employed individuals.<div class="Section1"><br /> <br /> Premiums paid on standard personal disability insurance are not deductible as a business expense but the proceeds are tax-exempt as compensation for personal injuries or sickness ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="382">382</a>).<a href="#_ftn2" name="_ftnref2">²</a> This is true even though a taxpayer intends to use the benefits to pay overhead expenses during periods of disability.<a href="#_ftn3" name="_ftnref3">³</a> (<em>See</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="377">377</a>.)<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 55-264, 1955-1 CB 11.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 55-331, 1955-1 CB 271; Rev. Rul. 70-394, 1970-2 CB 34.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; Rev. Rul. 58-480, 1958-2 CB 62; <em>Blaess v. Commissioner</em>, 28 TC 710 (1957); <em>Andrews v. Commissioner</em>, TC Memo 1970-32.<br /> <br /> </div></div><br />

<div class="Section1"><br /> <br /> Yes. A qualified profit sharing plan may provide health insurance benefits for its employee-participants within limits ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3830">3830</a>). A qualified pension plan may provide disability pensions, but will not qualify if it provides regular health insurance benefits for active employees. A qualified pension plan may provide health insurance benefits for retired employees ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3830">3830</a>). For tax consequences to employees, see Q <a href="javascript:void(0)" class="accordion-cross-reference" id="394">394</a>&nbsp;and Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3941">3941</a>.<br /> <br /> </div><br />

<div class="Section1">An employer generally can deduct all premiums paid for disability income coverage for one or more employees as a business expense.</div><br /> <div class="Section1"><br /> <br /> Premiums are deductible by an employer whether coverage is provided under a group policy or under individual policies. The deduction is allowable only if benefits are payable to employees or their beneficiaries; it is not allowable if benefits are payable to an employer.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> The deduction of premiums paid for a disability income policy insuring an employee-shareholder was prohibited where the corporation was the premium payor, owner, and beneficiary of the policy. The Tax Court held that IRC Section 265(a) prevented the deduction because the premiums were funds expended to produce tax-exempt income. The Tax Court stated that disability income policy benefits, had any been paid, would have been tax-exempt under IRC Section 104(a)(3).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><br /> <div class="refs"><br /> <br /> <hr align="left" size="1" width="33%" /><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.     Treas. Reg. § 1.162-10(a); Rev. Rul. 58-90, 1958-1 CB 88; Rev. Rul. 56-632, 1956-2 CB 101.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.     <em>Rugby Prod. Ltd. v. Commissioner</em>, 100 TC 531 (1993). <em>See</em> Rev. Rul. 66-262, 1966-2 CB 105.<br /> <br /> </div>

<div class="Section1">Premiums for non-medical care, such as personal disability income coverage, are not deductible.<a href="#_ftn1" name="_ftnref1">¹</a> Only premiums for medical care insurance are deductible as a medical expense ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="342">342</a>, Q <a href="javascript:void(0)" class="accordion-cross-reference" id="487">487</a>).<div class="Section1"><br /> <br /> A deduction is allowed for medical care that is not otherwise compensated for by insurance. The deduction is allowed to the extent that the medical care expenses exceed 7.5 percent of the taxpayer&rsquo;s adjusted gross income. The 10 percent limit was permanently reduced to 7.5 percent in 2020. The threshold is 7.5 percent for the alternative minimum tax.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 213(d)(1).<br /> <br /> </div></div><br />

<div class="Section1">Disability payments from a qualified plan receive different tax treatment, depending on whether the payments are made to common law employees (<em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="384">384</a>) or to self-employed individuals.<div class="Section1"><br /> <br /> If a self-employed individual draws benefits from a plan because of permanent disability, the disability payments will be taxed under the same rules that apply to retirement benefits ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="3969">3969</a>).<br /> <br /> If a self-employed individual receives disability payments through health insurance, the employee may exclude from gross income any amounts attributable to nondeductible contributions as a self-employed person.<a href="#_ftn1" name="_ftnref1">¹</a><br /> <br /> Where contributions under a qualified plan are applied to provide incidental accident and health insurance for a self-employed individual, the insurance is treated as if the employee had purchased it directly from the insurance company.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&sect; 105(g), 104(a)(3); Treas. Reg. &sect;&sect; 1.105-1(a), 1.105-5(b).<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.72-15(g).<br /> <br /> </div></div><br />

<div class="Section1">Much like a traditional IRC Section&nbsp;529 college savings plan, ABLE account distributions must be used to fund certain specified expenses of the disabled beneficiary or will become subject to a 10 percent penalty tax. In addition to the 10 percent penalty, any distributed earnings are taxed at the individual&rsquo;s normal income tax rate if the distribution is not used for qualified expenses.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> The range of qualified expenses is broad, and includes &ldquo;expenses related to the individual&rsquo;s disability,&rdquo; such as expenses for health care, housing, transportation, job training, assistive technology, personal support, financial management, legal fees and related services and expenses.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Individuals are generally limited to establishing only one ABLE account. Amounts initially contributed to an ABLE account can be rolled over into another ABLE account established either for the same beneficiary, or for a sibling of that beneficiary who also meets the eligibility requirements discussed in Q <a href="javascript:void(0)" class="accordion-cross-reference" id="386">386</a>. <em>See</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="388">388</a> for a discussion of changes to the contribution limits and rollover rules that impact ABLE accounts under the 2017 tax reform law&nbsp;and the 2025 OBBB.<br /> <br /> .<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; H.R. 647, &sect; 102.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; H.R. 647, &sect; 102.<br /> <br /> </div></div><br />

<div class="Section1">Whether a purchaser, policyowner, beneficiary, or premium payor is the business entity, as in an entity purchase agreement, or the business owner, as in a cross-purchase agreement, the premiums are nondeductible and the proceeds are exempt from regularly calculated income tax ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="377">377</a>).<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> Where a buy-out occurs between a corporation and a disabled shareholder, if the transaction qualifies as a complete redemption of all the shareholder&rsquo;s shares, the redemption will be treated as a capital transaction ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="300">300</a>). That is, the transaction will be considered the sale of a capital asset and the selling shareholder&rsquo;s gain or loss will be measured and taxed. A disability buy-out between shareholders also is a capital transaction and is taxed accordingly.<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> Where a buy-out occurs between a partnership and a disabled partner, resulting in a termination of the disabled partner&rsquo;s interest, the transaction is taxed under the rules applying to a liquidation of a partner&rsquo;s interest ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="311">311</a>).<br /> <br /> Where a buy-out occurs between partners, the transaction is taxed under the rules applying to a sale of a partner&rsquo;s interest ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="311">311</a>).<br /> <br /> When a disabled business owner realizes gain on the sale of his or her business interest, the amount of gain is includable in his or her gross income in the taxable year in which the gain is actually or constructively received unless the gain is includable in a different year due to the taxpayer&rsquo;s method of accounting.<a href="#_ftn3" name="_ftnref3">³</a> If a sale qualifies as an installment sale, a pro rata portion of the gain is reportable for each taxable year installment payments are received.<br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&sect; 104(a)(3), 265(a)(1); Rev. Rul. 66-262, 1966-2 CB 105.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect;&sect; 61(a)(3), 1001, 1011, 1221, and 1222.<br /> <br /> <a href="#_ftnref3" name="_ftn3">3</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.451-1(a).<br /> <br /> </div></div><br />

<div class="Section1">Benefits from personal disability income coverage typically are entirely exempt from income tax. There is no limit on the amount of benefits, including the amount of disability income that can be received tax-free under personally paid disability income coverage.<a href="#_ftn1" name="_ftnref1">¹</a><div class="Section1"><br /> <br /> If benefits are received under a plan to which both an employer and employee have contributed, the portion of the disability income attributable to the employee&rsquo;s contributions is tax-free ( Q <a href="javascript:void(0)" class="accordion-cross-reference" id="380">380</a>).<a href="#_ftn2" name="_ftnref2">²</a><br /> <br /> </div><div class="refs"><br /> <br /> <hr align="left" size="1" width="33%"><br /> <br /> <a href="#_ftnref1" name="_ftn1">1</a>.&nbsp;&nbsp;&nbsp;&nbsp; IRC &sect; 104(a)(3); Rev. Rul. 55-331, 1955-1 CB 271, modified by Rev. Rul. 68-212, 1968-1 CB 91; Rev. Rul. 70-394, 1970-2 CB 34.<br /> <br /> <a href="#_ftnref2" name="_ftn2">2</a>.&nbsp;&nbsp;&nbsp;&nbsp; Treas. Reg. &sect; 1.105-1(c).<br /> <br /> </div></div><br />

<div class="Section1">The tax credit (<em>see</em> Q <a href="javascript:void(0)" class="accordion-cross-reference" id="430">430</a>) is effective for 2010 and thereafter. Beginning in 2014, it is only available for two consecutive years. Thus, the maximum number of years that an employer can take advantage of this tax credit is six, namely 2010 through 2013, plus any two consecutive years beginning in 2014.</div><br />